Shifting its initial review of the capital sufficiency of monoline bond insurers into an "ongoing analysis," Fitch Ratings said late Tuesday that it will update modeling assumptions used to assess the strength of major rated financial guarantors. The bottom line: capital adequacy is no longer all that matters for monoline ratings, as Fitch said that rapidly increasing claims payments alone would be enough to throw 'AAA' financial strength ratings into question -- regardless of the level of capital. From the press statement:
Fitch believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors -- even more problematic than the previously discussed increases in 'AAA' capital guidelines, which has been the primary focus of recent analysis of the industry. Expected losses reflect an estimate of future claims that Fitch believes would ultimately need to be paid by a guarantor. A material increase in claim payments would be inconsistent with 'AAA' ratings standards for financial guarantors, and could potentially call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels.
The core risk factor here is exposure to structured finance CDOs, primarily those backed by subprime mortgage assets, which Fitch said face "material" increases in previously-expected losses. Beyond expected losses, Fitch said that its capital guidelines were likely to increase "materially" as well -- suggesting that monoline insurers, including MBIA, would need to raise significant new capital in order to maintain their current 'AAA' rating. Not surprisingly, both MBIA and CIFG were put on negative ratings watch by Fitch soon after it announced the new ratings assumptions. Both MBIA and CIFG raised $1.5 billion in the past month to meet prior modeled capital shortfalls; Fitch said that the additional capital raised so far at each company would likely not be enough to maintain a 'AAA' rating. There has been plenty of discussion lately on a proposed bail-out of the guarantors by various large financial institutions dependent on their guaranty business; it's clear that the price tag of any potential bail-out is likely to go up significantly at this point. The $15 billion that had reportedly been suggested by New York Insurance Superintendent Eric Dinallo in late January is looking like it may already be out-of-date. Having just returned from ASF 2008, I can tell HW readers that the monoline issue is one of the largest concerns hanging over the secondary market at this point in time. Goldman Sachs CFO David Viniar said Wednesday that rescuing bond insurers will help solve some -- but not all -- of the industry's problems, according to a report filed by Reuters this morning. Viniar suggested that any bail-out of the monoline industry will be more challenging than the well-publicized bail-out of Long Term Capital Management over a decade ago.