The furor over monoline bond insurers reared its ugly head again Wednesday afternoon, with Moody’s Investors Service warning that it would likely downgrade both MBIA Inc. (MBI) and Ambac Financial Corp. (ABK) over concerns that each company’s deteriorating credit profiles no longer put them into Aaa-rated territory. Already-battered shares of both companies plummeted on the news, with Ambac falling more tha 17 percent and MBIA falling more than 16 percent; shares in MBIA were at $5.64, off 15.7 percent, when this story was published. Ambac was trading at $2.53, off 15.67 percent. “MBIA’s credit profile may no longer be consistent with current ratings given the company’s diminished new business prospects and financial flexibility, coupled with the potential for higher expected and stress losses within the insurance portfolio,” the ratings agency said in a press statement. Moody’s made similar comments about Ambac, as well, although it noted that the insurer’s mortgage exposure was particularly more problematic. Moody’s said that recent mortgage performance data, and MBIA’s own reported first quarter results, were “indicative of continued deterioration within the guarantor’s insured portfolio.” A ratings downgrade to Aa was the likely outcome of the review process, the agency said. Jay Brown, MBIA chairman and CEO — not surprisingly — took issue with the news of a potential downgrade. “We disagree with Moody’s decision today,” Brown said in a press statement. “When Moody’s affirmed our rating with a negative outlook in February, we believed that it would refrain for six to 12 months from taking additional ratings actions unless the environment or MBIA’s position changed materially.” MBIA had planned to fund its insurance subsidiary with $900 million needed to retain a Aaa-rating; Brown said that “in light of Moody’s action today, we will continue to hold the cash at the holding company level pending our strategy review and consultation with our board.” Ambac CEO Michael Callen took a similar tack, suggesting that any problems facing the New York-based insurer were “temporary.” “The timing of Moody’s announcement is unfortunate since we believe that the uncertainty surrounding Ambac is temporary,” he said. “Outside the mortgage-related exposures, the remainder of our portfolio is performing well, and in line with our expectations.” Of course, it’s those looming mortgage exposures that have Moody’s most worried, with the agency singling out Ambac’s exposure in that segment of its insured portfolio as particularly problematic for a continued Aaa rating. Insurers like MBIA and Ambac provided the top-rated portions of private-party RMBS and related CDO deals with a guarantee that essentially was designed to serve as a proxy for the government guarantee that exists on Fannie/Freddie/Ginnie mortgage bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it — which means that increasing MBS losses have led to assumptions of increasing losses for investors by rating agencies, imperiling both the insurers that guaranteed principal payments as well investors in some of the most senior tranches of securitized transactions. Disclosure: The author held no positions in MBI or ABK when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
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