Rating Agencies Hold Off Downgrading MBIA, Ambac
Major rating agencies are holding off downgrading bond insurers MBIA and Ambac Financial Group while they attempt to work out a bailout plan, bankers working on the bailout told CNBC.
As reported, the ratings agencies Moody's and Standard & Poor's are poised to downgrade the coveted Triple A rating of the bond insurers, whose main business is guaranteeing municipal bonds but which recently entered the risky subprime debt market and lost billions of dollars. Just today, MBIA , the world's largest bond insurer, posted a quarterly loss after writing down $3.5 billion in risky debt.
Losing their Triple A rating could be devastating for the bond insurers because it could prevent them from drumming up new clients and possibly force them out of business.
States and cities that issue municipal bonds, meanwhile, could see their own bonds downgraded because of questions about the insurers' ability to back up those bonds.
Banks could also be hit. According to Meredith Whitney, banking analyst at Oppenheimer, U.S. financial institutions could face fresh write-downs of as much as $70 billion if the bond insurers lose their top rating.
For that reason, the issue of downgrading bond insurers has become politically sensitive.
The bond insurers haven't completely escaped downgrades. Late Thursday, S&P cut its "AAA" ratings on FGIC's bond insurance arm, and placed its top ratings on the bond insurance arm of MBIA on review for downgrade. The rating agency also said it may cut the "AAA" rating of XL Capital Assurance, the bond insurance arm of Security Capital Assurance.
On Wednesday, Fitch Ratings downgraded FGIC after earlier downgrading Ambac .
Even the stock market has become worried about a potential meltdown among bond insurers. On Wednesday, a strong rally sparked by the Fed's latest cut in interest rates quickly collapsed after CNBC reported that the bond insurers could be downgraded soon and that a prominent short-seller believed their losses were bigger than reported.
During a Thursday conference call, MBIA Chief Executive Gary Dunton said the troubled bond insurer has been the target of "fear mongering" by self-interested parties. He said the company will have real and significant losses, but nothing to justify the sharp decline in MBIA's shares. He also said MBIA is in the best position to maintain Triple-A ratings among public bond insurers.
New York state insurance regulators, meanwhile, are trying to work out a bailout plan for the bond insurers and have urged the rating agencies to hold off on any downgrades. Bankers who are working on a bailout plan have given themselves an unofficial timetable of about two weeks to work something out. But people involved in the discussions say progress is slow and it's unclear if any bailout involving the banks will get done.
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.
One wrinkle in working out a bailout is that William Ackman, a hedge fund manager and short-seller of MBIA, has submitted data to the Securities and Exchange Commission and insurance regulators in New York State alleging that MBIA and Ambac are understating their losses.
In his report, Ackman, of Pershing Square Capital, contends 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.
If the the losses are as large as Ackman claims, Wall Street firms may be hesitant to help bail out the bond insurers.
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.
One possible scenario is that New York State commissioner Eric Dinallo could force a prepackaged bankruptcy of the bond insurers and split the municipal bond insurance from that of the risky subprime debt. The municipal bond insurance business could be sold off, while the risky debt insurance would likley be written off.
Both Moody's and S&P declined comment.
-- Reuters contributed to this story