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.
Fitch Cuts Ambac to AA; First Monoline to Lose AAA Status
Fitch Ratings today did what some thought might not happen -- it downgraded a AAA-rated monoline insurer. The rating agency downgraded troubled guarantor Ambac Financial Group and its affliliates, after the insurer said Friday morning that it would abandon a plan to raise the additional capital needed to maintain its rating. Ambac saw its insurer financial strength rating downgraded two notches to 'AA,' while the rating agency dropped a host of other ratings as well, including moving the insurer's long term rating to 'A' from 'AA.' The downgrade came after U.S. bond markets had closed for a long weekend, due to the upcoming Martin Luther King, Jr. holiday in the United States. From the press statement, Fitch said that the downgrade reflected "significant uncertainty with respect to the company's franchise, business model and strategic direction," as well as citing future capital strategy and loss levels in its insured portfolio as contributing factors. 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: