MBIA & Ambac Implied Rating... Below Junk
The credit quality of bond insurers, which have been at the center of the subprime storm, differs dramatically.
The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.
The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt.
David Munves, managing director for credit strategy research at Moody's Analytics says...
that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings.
The Moody's unit reports that implied ratings for one year have a 91% accuracy ratio compared with an 82% ratio for Moody's official ratings.
MBIA and Ambac veered away from the plain-vanilla business of insuring debt issued by municipalities and corporations
and began selling credit-default swaps, which are a type of insurance, to banks eager to hedge their own risks from collateralized debt obligations.
Because many of those CDOs were bundles of debt laced with securitized subprime home loans and other asset-backed securities,
the insurers might now shoulder tens of billions of dollars in losses. Moody's has the top two bond insurer's rated AAA.
Moody's implied-ratings group paints a completely different picture. Using CDS market prices,
Moody's assigns implied ratings of Caa1 to both MBIA and Ambac. That's seven notches below junk and 15 below the official Moody's rating.
Tim Backshall, of Credit Derivatives Research LLC: "The only thing holding them at AAA is simply the model that the rating agencies claim
they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default."
Hattip to Bloomberg.
The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.
The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt.
David Munves, managing director for credit strategy research at Moody's Analytics says...
that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings.
The Moody's unit reports that implied ratings for one year have a 91% accuracy ratio compared with an 82% ratio for Moody's official ratings.
MBIA and Ambac veered away from the plain-vanilla business of insuring debt issued by municipalities and corporations
and began selling credit-default swaps, which are a type of insurance, to banks eager to hedge their own risks from collateralized debt obligations.
Because many of those CDOs were bundles of debt laced with securitized subprime home loans and other asset-backed securities,
the insurers might now shoulder tens of billions of dollars in losses. Moody's has the top two bond insurer's rated AAA.
Moody's implied-ratings group paints a completely different picture. Using CDS market prices,
Moody's assigns implied ratings of Caa1 to both MBIA and Ambac. That's seven notches below junk and 15 below the official Moody's rating.
Tim Backshall, of Credit Derivatives Research LLC: "The only thing holding them at AAA is simply the model that the rating agencies claim
they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default."
Hattip to Bloomberg.
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