The Ratings Game & Your Pension
Something we have Nattered about many a time, debt quality ratings and the cost of debt insurance.
Toby Nangle, at Baring Asset Management: "Investors in guaranteed debt have never questioned the AAA guarantee from monolines."
Throwing the Red Flag... "Given the recent rise in the perception of risk, they "may start to wonder if the emperor has no clothes."
Ambac guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds. FGIC has insured $314 billion of debt.
Under review... The AAA ratings of debt & securitie's insurer's MBIA, Ambac Financial Group and their five smaller competitors are being reviewed by Moody's Investors Service and Fitch Ratings.
Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.
Operators are standing by...
Credit default swaps on MBIA more than tripled to 410 basis points since Oct. 15 while contracts on Ambac have climbed to 620 basis points.
A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
The prices of these derivatives indicates, MBIA, the world's largest debt & securities insurer, has a 28% probability of default, and Ambac's is now 40%.
Ambac, FGIC Corp. and CIFG Guaranty, have a high or moderate chance of being told to add capital or forfeit their top status.
About 110 municipal bond mutual funds are required to hold most of their assets in AAA debt.
As many as half of all municipalities have an underlying credit strength equivalent to AAA.
Order now... A drop in rating would force the mutual funds to liquidate the non AAA debt.
Municipalities ranked A pay $190,000 more a year in interest on $100 million of debt than those with AAA bonds.
If yields on half of all insured munis were to rise by 19 basis points, reflecting the difference between AAA insured yields and A rated yields, the loss in value would be $9 billion.
But thats not all you get... The insurer's now guarantee almost $100 billion of CDO collateralized debt obligations backed by subprime mortgage securities.
Banks and investors in CDOs may be forced to write down the debt by more than $30 billion if the debt became uninsured.
If you act now... Then there is the $1 trillion market for insured securities backed by assets such as home equity and consumer loans.
MBIA guarantees $15.9 billion of CDOs backed by subprime mortgages and had excess capital of about $550 million.
Thats a 32 to 1 capital to potential liability ratio, raising the spectre of a large solvency problem for the insurer's.
Ambac had a cushion of about $1.15 billion on $29.3 billion of CDOs backed by home loans. FGIC has $350 million more than it needed for $10.3 billion of securities.
ACA's cushion was around $500 million for $15.7 billion of subprime-backed CDOs.
Dont lose out of this fabulous offer...
Had the insurers reduced the values of the bonds they guaranteed by the same magnitude as the recent debt writedowns at Merrill and Citigroup...
MBIA would have taken a $3 billion hit, instead of $342 million. Ambac would have had a $6.1 billion loss, rather than the $743 million it reported.
ACT NOW!!! Based on the rise in default swap rates on Ambac, insured securities backed by home equity lines of credit have fallen by 15% this year.
If the entire insured market were to drop that far, it would reduce the value of the securities by $150 billion.
The potential losses would be so huge that government would step in to prevent losses from hurting municipal bondholders...
many of them retirees, pension funds, and states and municipalities, which could be prevented from liquidating their plunging debt holdings.
The Nattering One muses... there is potential for alot of ERISA lawsuits in the next few years...
as many already under funded public and private pension plans could get wiped out. Hattip to Bloomberg.
Toby Nangle, at Baring Asset Management: "Investors in guaranteed debt have never questioned the AAA guarantee from monolines."
Throwing the Red Flag... "Given the recent rise in the perception of risk, they "may start to wonder if the emperor has no clothes."
Ambac guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds. FGIC has insured $314 billion of debt.
Under review... The AAA ratings of debt & securitie's insurer's MBIA, Ambac Financial Group and their five smaller competitors are being reviewed by Moody's Investors Service and Fitch Ratings.
Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.
Operators are standing by...
Credit default swaps on MBIA more than tripled to 410 basis points since Oct. 15 while contracts on Ambac have climbed to 620 basis points.
A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
The prices of these derivatives indicates, MBIA, the world's largest debt & securities insurer, has a 28% probability of default, and Ambac's is now 40%.
Ambac, FGIC Corp. and CIFG Guaranty, have a high or moderate chance of being told to add capital or forfeit their top status.
About 110 municipal bond mutual funds are required to hold most of their assets in AAA debt.
As many as half of all municipalities have an underlying credit strength equivalent to AAA.
Order now... A drop in rating would force the mutual funds to liquidate the non AAA debt.
Municipalities ranked A pay $190,000 more a year in interest on $100 million of debt than those with AAA bonds.
If yields on half of all insured munis were to rise by 19 basis points, reflecting the difference between AAA insured yields and A rated yields, the loss in value would be $9 billion.
But thats not all you get... The insurer's now guarantee almost $100 billion of CDO collateralized debt obligations backed by subprime mortgage securities.
Banks and investors in CDOs may be forced to write down the debt by more than $30 billion if the debt became uninsured.
If you act now... Then there is the $1 trillion market for insured securities backed by assets such as home equity and consumer loans.
MBIA guarantees $15.9 billion of CDOs backed by subprime mortgages and had excess capital of about $550 million.
Thats a 32 to 1 capital to potential liability ratio, raising the spectre of a large solvency problem for the insurer's.
Ambac had a cushion of about $1.15 billion on $29.3 billion of CDOs backed by home loans. FGIC has $350 million more than it needed for $10.3 billion of securities.
ACA's cushion was around $500 million for $15.7 billion of subprime-backed CDOs.
Dont lose out of this fabulous offer...
Had the insurers reduced the values of the bonds they guaranteed by the same magnitude as the recent debt writedowns at Merrill and Citigroup...
MBIA would have taken a $3 billion hit, instead of $342 million. Ambac would have had a $6.1 billion loss, rather than the $743 million it reported.
ACT NOW!!! Based on the rise in default swap rates on Ambac, insured securities backed by home equity lines of credit have fallen by 15% this year.
If the entire insured market were to drop that far, it would reduce the value of the securities by $150 billion.
The potential losses would be so huge that government would step in to prevent losses from hurting municipal bondholders...
many of them retirees, pension funds, and states and municipalities, which could be prevented from liquidating their plunging debt holdings.
The Nattering One muses... there is potential for alot of ERISA lawsuits in the next few years...
as many already under funded public and private pension plans could get wiped out. Hattip to Bloomberg.
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