In the Crosshairs: Bond Insurers

Keeping up with the developments in the bond insurance side of the secondary market has been a trying task this past week, but an important one for anybody working in mortgage banking.

On the heels of Fitch Ratings’ announcement that guarantors would possibly face downgrades regardless of capital levels — Fitch also said capital guidelines were likely to increase — MBIA Inc. said late Wednesday that it would sell $750 million in stock as part of an effort to avert a downgrade. Any shortfall in the sale would be covered by private-equity firm Warburg Pincus, who has already sunk $500 million into the troubled monoline.

Billionaire investor Wilbur Ross, in an interview with Bloomberg on Wednesday, suggested the new capitalization plan comes after consulting with the rating agencies.

“I would be astonished if they hadn’t consulted with the rating agencies before they made this announcement,” Ross said. “To raise this much capital, particularly from the public, and then get a downgrade, I would think people would be extremely upset with that. There would be litigation and God knows what else.”

Deutsche Bank AG CEO Josef Ackermann said Thursday that downgrades at bond insurers would threaten stability at many financial institutions, perhaps eclipsing the initial effects of the subprime mortgage crisis:

“It could be a tsunami-like event comparable to subprime,” Ackermann said in a Bloomberg Television interview in Frankfurt today. Deutsche Bank, Germany’s biggest bank, is “well positioned” on its risk from bond insurers, he said.

Bond investors stand to lose $200 billion should MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. forfeit their AAA grades because of declines in mortgage-backed securities they insure, according to data compiled by Bloomberg. Ratings on $2.4 trillion of debt that the industry guarantees would be thrown into doubt.

ECB president Jean-Claude Trichet took issue with Ackermann’s comments, according to Bloomberg. Trichet is quoted as saying the market correction “is not something which should surprise us, it’s an ongoing process.”

Back in the States, New York Insurance Superintendent Eric Dinallo has been trying to orchestrate a rescue of some of the troubled insurers, and media reports suggest he may be having more success now than when he first started the effort.

Bloomberg reported Wednesday that Ambac Financial Group, Inc. — who already lost its AAA rating from Fitch — is being targeted for one bank-led bailout effort, including Citigroup Inc. and UBS AG. The Wall Street Journal also reported Wednesday that a unit of Credit Agricole SA is mulling a separate bailout of Financial Guaranty Insurance Co.

Congressman Paul Kanjorski (D-PA), chairman of the U.S. House Financial Services subcommittee, released on Wednesday a series of formal assessments by various regulators to problems in the bond insurance market.

Kanjorski said he is especially concerned about the effects of the recent decisions by ratings agencies to downgrade a number of bond insurers on municipal debt markets. States, counties, and localities often rely on bond insurance to lower their borrowing costs for building bridges, repairing roads, fixing schools, and easing budget constraints.

Among the letters disclosed was a reply from Dinallo that noted his department has “for several months” been looking to “bring in new players” into the bond insurance market.

“The Department in November not only initiated a discussion with Berkshire Hathaway to open a new bond insurance company in New York,” Dinallo wrote, “but … is also talking to others interested in entering this market.”

Numerous market participants have suggested to HW that solving the bond insurer crisis is the single most important aspect to jump-starting the mortgage secondary markets going forward.