You are here

Credit crisis hits top U.S. bond insurer

Section: Daily Dispatches

By Stephen Bernard
Associated Press
via Yahoo News
Thursday, December 20, 2007;_ylt=AnN0d6JD2Gy9gQ...

NEW YORK -- The credit crisis spread to the nation's largest bond insurer Thursday, sending shares of MBIA Inc. plunging and calling into question the safety of tens of billions of dollars of company and local government debt held by investors.

The Fitch Ratings service warned that it might cut its rating on MBIA in the next six weeks if the company cannot find $1 billion in new capital. That followed a disclosure by MBIA that of the $30 billion in mortgage debt guarantees it issued, some $8 billion were for the the riskiest types.

One analyst said he was shocked by the magnitude of that exposure. A call seeking comment from MBIA officials at the company's headquarters in Armonk, N.Y., was not returned immediately Thursday.

For the last decade, Wall Street firms have profited by bundling and selling pools of mortgages, auto loans, credit card bills, and more to investors. The riskiness of these securities was thought to be offset by the promise from insurers like MBIA that they would step in to make principal and interest payments if issuers defaulted.

Because default rates have been low, bond insurers' earnings and share prices had soared -- until recently. The fear now is that if MBIA or competitors like Ambac Financial Group Inc. and Financial Guaranty Insurance Corp. are unable to pay what could be a surge in claims on debt issues gone bad, it could overwhelm the already-suffering credit markets.

MBIA shares plummeted more than 26 percent Thursday, falling $7.07 to $19.95 and wiping out more than $880 million in market capitalization.

MBIA is the largest of the "AAA" bond insurers, those that are viewed by rating agencies as having so much financial and claims-paying strength that they deserve the highest rating.

Because of its size, many analysts have warned of dire consequences for the bond market if MBIA is downgraded, which would effectively prevent it from issuing new policies.

Some analysts questioned why MBIA strayed from insuring municipal bonds into riskier mortgage-backed debt.

In a release late Wednesday, MBIA said its total exposure to bonds backed by mortgages and collateralized debt obligations is about $30.61 billion. Included in that exposure is a pool of about $8.14 billion in CDOs backed by a combination of other CDOs and mortgages, which some analysts consider the riskiest.

Citi Investment Research analyst Heather Hunt said the disclosure of the $8.14 billion of the riskiest CDOs was a "disappointment" and MBIA is in an "extremely volatile situation," but in the end the exposure will not be as bad as it first appears.

Hunt added that based on the current stock price, investors estimate MBIA will lose more than $7.5 billion after taxes from its total mortgage and CDO exposures.

CDOs are complex instruments that combine slices of assets and other debt.

Another credit rating agency, Standard & Poor's, said it fully incorporated MBIA's exposure to mortgage bonds and CDOs when it affirmed the insurer's "AAA" rating Wednesday. But S&P did place the company on a negative outlook, which means it views the company as having a one-in-three chance of being downgraded in the next two years.

The action on MBIA was one of a handful of bond insurer warnings and downgrades S&P made Wednesday, the sum of which S&P said could lead to a fundamental change in the way the bond insurance industry operates. In particular, it downgraded insurer ACA Capital to "CCC" from "A," a move that affected billions of dollars in municipal bonds nationwide.

The value of the mortgage-backed bonds and CDOs has been declining rapidly in recent months as the underlying debt has increasingly defaulted. Many CDOs and mortgage bonds are backed by subprime mortgages, given to customers with poor credit history, which have been among the worst-performing loans.

Morgan Stanley analyst Ken Zerbe said the size of MBIA's exposure was surprising and riskier than he had thought. Zerbe questioned why MBIA waited to detail its positions. He recommends avoiding investing in all bond insurers until they can accurately assess the final size and scope of their mortgage and CDO losses.

* * *

Join GATA here:

Vancouver Resource Investment Conference
Sunday-Monday, January 20-21,2008
Vancouver, British Columbia, Canada

* * *

Reserve the dates:

The next GATA conference
Friday and Saturday, April 18 and 19, 2008
Maybe "Gold Rush 21-08 -- Anybody Seen Our Gold"?
Washington, D.C., area

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.