NEW YORK (Reuters) - Fear of bond insurers losing their investment-grade credit ratings is rattling investors as estimates mount for the cost of paying for the latest chapter in the widening U.S. credit crisis.
By Herbert Lash
NEW YORK (Reuters) - Fear of bond insurers losing their investment-grade credit ratings is rattling investors as estimates mount for the cost of paying for the latest chapter in the widening U.S. credit crisis.
Many investors hoped the worst was over when banks took about $100 billion in write-downs in the fourth quarter for subprime-related loans. Investors thought the big global banks had cleared the decks to put their losses behind them.
But Wall Street is having second thoughts about the depth of the crisis and many investors now fear more pain is in store, especially if MBIA Inc <MBI.N> and Ambac Financial Group Inc <ABK.N> -- the largest bond insurers -- lose their triple-A ratings.
!ADVERTISEMENT!U.S. monoline bond insurers back stop about $2.3 trillion in debt.
Wall Street stock indexes are already feeling the pressure. The markets rose sharply on Wednesday after the second Federal Reserve interest rate cut in eight days, but those gains were erased after a television commentator said he believed the two biggest bond insurers will lose their 'AAA' credit ratings.
The downgrade of MBIA or Ambac would not be well received by investors, said Ralph Cole, who helps manage $2.5 billion in assets at Ferguson Wellman Capital Management in Portland, Oregon.
"But something like this (a downgrade) would just extend the expected recovery date that much further out -- there would be that much more risk associated with financial stocks," Cole said.
If the insurers go bust, the cost of paying for the losses and recapitalizing the insurers would be about $130 billion, Independent Strategy, a London-based consultancy, has estimated.
"That would be the hit to the taxpayer to put the sector back on its feet," it said in a note to investors.
MBIA and Ambac face losses of more than $23 billion from bonds they insure, and should be forced to stop paying dividends, hedge fund Pershing Square Capital told regulators in a letter.
The fund has bet the companies' stock prices will fall.
Meanwhile, the Oppenheimer brokerage said on Wednesday that U.S. financial institutions are on the hook for as much as $70 billion in new write-downs from the bond insurers -- known as monolines in the industry -- in 2008, but write-offs will more likely be about $40 billion.
"We have dramatically changed our thought process with respect to the monolines and their impact on banks and the larger financial market," Oppenheimer said on Wednesday.
"Among the myriad of negatives that surround financial stocks today, there is no issue more critical than the fate of the monoline insurers," it said.
However, Oppenheimer & Co said it no longer thinks systemic risk is realistic or a bailout of the monolines is viable.
About $80 billion of eventual losses for the six biggest bond insurers can be expected, Sean Egan, managing director of credit rating firm Egan-Jones Ratings Inc, said last week.
The bond insurers have about $47 billion to cover their claims, Independent Strategy said. But if losses range from 18 percent to 22 percent on the $335 billion in real estate-based credit derivatives they insure, that in itself would be about $65 billion, it said.
How bad a monoline failure would be depends on the analysis with estimates ranging from $15 billion to $200 billion, Independent Strategy said.
Assuming only $107 billion of the credit default swaps are truly junk because they are based on subprime mortgages and low-grade CDOs, the lower figure is feasible if losses on the default swaps are 15 percent, it said.
The higher figure comes from assuming all $825 billion of swaps get hit and losses are about 25 percent, it added.
