By Jennifer Yousfi
Moody's Investors Service on Friday downgraded the debt rating of key bond insurers MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK), increasing expectations that more write-downs are in the offing for the U.S. financial-services sector, which has already written off nearly $400 billion in losses.
Moody's Investors Service, subsidiary of Moody's Corp. (MCO), downgraded MBIA to A2 from Aaa, and Ambac from Aaa to Aa. The downgrade caused MBIA shares to shed more than 13% of their value, with an 86-cent decline to close at $5.59 on Friday. Ambac shares fared a bit better, gaining 2 cents to close at $2.05.
Many even question MBIA's very survival, as it lacks the $2.6 billion in capital needed to regain its Aaa rating, according to Moody's.
MBIA Chairman and Chief Executive Jay Brown fought off critics, saying that "despite the change in our ratings from Moody's, our financial condition is very strong."
"We remain committed to maintaining capital strength for our policyholders and financial flexibility consistent with our goals of increasing shareholder value," Brown added in a company statement.
The downgraded ratings may have had an immediate affect on the insurers' share prices, but also raised more questions about the more than $1 trillion in securities the firms guarantee. Those securities become riskier with the downgrade of the guaranteeing firms, making it more likely that defaults will escalate.
"The trouble for the banks is that the protection provided by the monolines becomes 'less effective' as the credit ratings of the monolines are downgraded," said Simon Adamson, an analyst at CreditSights, MarketWatch reported.
"In other words, the probability that the monolines will pay out on the contracts decreases," he wrote in a note to clients last week.
Some see the decline in ratings as an open door to new competitors.
"The issue really is, would they ever be able to get back to a triple A rating and I would think that would be a very heavy lift for them," billionaire investor Wilbur Ross said in an interview on Bloomberg Television on Friday. "On the other side of this credit crunch, people will be even more sensitive about ratings and the quality of the paper they're buying."
And it's likely that the "other side" of the credit crunch is still far off, according to analysts at the Royal Bank of Scotland Group PLC (ADR: RBS).
RBS analysts have warned clients to brace for a full-blown crash in the global stock-and-bond markets in the next three months, as the conflicting realities of slowing growth and rising inflation paralyze the world's major central banks – causing "all the chickens [to] come home to roost," Great Britain's Daily Telegraph newspaper reported.
The predicted swoon would cause the U.S. Standard & Poor's 500 Index – already down 16% from its trading high of 1,576.09 reached Oct. 11 – to nosedive all the way down to 1,050 by September. For the closely watched, broad-based U.S. stock index, that would represent an additional decline of 20% from Friday's close of 1,317.93- and a total decline of 33% from its Oct. 11 apex.
News and Related Story Links:
MBIA falls 7% after Moody's cuts rating
Bond insurer downgrades reignite write-down fears
- Bloomberg News:
Ambac, MBIA Unlikely to Regain Top Ratings, Ross Says