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Friday, January 18, 2008


first monoline downgrade

via housing wire, fitch today cut ambac to double-a. the ghoul of counterparty risk has officially visited wall street.

This is going to be felt in the mortgage industry, without question; a number of downgrades on various Ambac-wrapped MBS will be forthcoming. And, of course, the question of whether Ambac goes into run-off has to now be asked.

This story from Dow Jones gives a hint of insight as to what this downgrade might end up meaning for firms like UBS, Merrill Lynch and Citigroup — just looking at already downgraded ACA Capital:

Using Merrill as a rough model, Oppenheimer analyst Meredith Whitney says the top 10 bank underwriters of collateralized debt obligations last year may have to write off $10.1 billion of the $12.7 billion of their bonds insured by ACA. And that estimate is based on her assumption that the insurance is worth 20 cents on the dollar - above the level of Merrill’s reserve.

At the top of the list is UBS AG (UBS), which was the biggest underwriter of asset-backed CDOs in last year’s third quarter when ACA was most active issuing CDO insurance. UBS will have to write down $1.4 billion of its ACA-backed hedges, Whitney estimates. It is followed by Citigroup Inc. (C) - the biggest CDO underwriter in last year’s second quarter - with an estimated $1.398 billion of losses, and Merrill, according to Whitney.

Representatives for Merrill and Citigroup declined to comment, and UBS did not immediately respond to requests for comment.

ACA likely sold protection on about 7% of all asset-backed CDO insurance sold in 2007, Whitney estimated, and on 32% in the third quarter when UBS was most active.

Ambac is much larger than ACA, so this could get ugly. And just for the record, I hate to see this.

i've blogged about the monolines here, here, here and here. MBIA is surely next, now that the period of forbearance has apparently ended.

the question now is, what of it?

it is certainly possible that billions will have to be set aside or written down by major banks holding CDOs and RMBS backed by ambac's insurance. however, the slide of the monolines took enough time that many of the banks may have been able to seek and buy alternative insurance (at a cost) for those securities which they could not tolerate reserving against. while this is difficult long-run news for banks and municipalities, it may not be an immediate disaster.

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