Bond insurers, whose foray into the subprime debt market has led to billions of dollars in losses, are facing more downgrades of their prized Triple A rating.
FGIC's bond insurance arm lost its top "AAA'' rating from Fitch Ratings on Wednesday, while two other big bond insurers, AmbacFinancial Group and MBIA , also may be downgraded soon despite efforts by New York state insurance regulators to get a delay to allow time for a possible bailout.
The growing threat of downgrades, first reported on CNBC late Wednesday afternoon, helped reverse a big stock market rally that was sparked by the Fed's half-point cut in interest rates. Stocks ended up closing lower.
Like other bond insurers, FGIC initially focused on municipal bond deals but ventured into riskier debt securities to boost returns. Massive defaults on U.S. subprime mortgages battered the credit quality of these products, increasing the capital bond insurers needed for an ``AAA'' rating.
Losing a Triple A rating could be devastating for the bond insurers, preventing them from drumming up new clients -- and possibly forcing them out of business.
Ambachas already received a downgrade from rating agency Fitch, but has so far been spared by Standard & Poor's and Moody's. MBIA hasn't been downgraded.
Late Wednesday evening, MBIA announced that private-equity firm Warburg Pincus completed a $500 million investment in the bond insurer, paying $31 a share for stock that has fallen to $13.96 a share since the deal was announced last month.
The company on Wednesday also said Warburg managing directors David Coulter and Kewsong Lee were named to the MBIA board. MBIA said a director Richard Walker, general counsel of Deutsche Bank, resigned to avoid any appearance of potential conflicts of interest in light of ongoing bail-out talks among bond insurers, investment banks and New York state's insurance department.
MBIA will host an investor conference call Thursday morning and may provide some clarity on any proposed bailout or if there are additional private equity infusions on the way. MBIA will only take questions that have been emailed to them beforehand, however.
Meanwhile, William Ackman, a hedge fund manager and short-seller of MBIA, is submitting data to the Securities and Exchange Commission and insurance regulators in New York State alleging that MBIA and Ambacare understating their losses.
In his report, Ackman, of Pershing Square Capital, will contend that both bond insurers have said their mark-to-market losses are less than $1.5 billion, but according to his analysis, the losses for each firm will be around $12 billion.
Ackman has come up with this number through an analysis of the vast majority of the CDOs that have been insured by the company. He will claim that his analysis is conservative, meaning that if there is a question about a particular CDO, he doesn’t assume a worst case scenario.
CNBC has confirmed that Ackman has recently met with investor Wilbur Ross to discuss Ross’ examination of Ambac. Ross is interested in buying one of the troubled insurers rather than starting one of his own.
Sources say Ross may be hesitant to put more than $1 billion into Ambac, so if Ackman is right, it might end Ross' interest in the bond insurer.
Wilbur Ross has declined to comment.
- Reuters contributed to this report.