On the heels of a warning
from Moody's Investors Service on Wednesday, Standard & Poor's Rating Services on Thursday said it had gone one step further
and knocked both MBIA Inc. (MBI)
and Ambac Financial Corp. (ABK)
from their respective AAA-ratings perches. Citing concerns over a lack of new business prospects and concerns over continuing declines within the residential mortgage market, S&P said that it had cut both bond insurance giants' financial strength ratings to the AA level.
"The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility," S&P said in a statement
"In addition, we believe continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO structures will place increasing pressure on capital adequacy."
Yesterday, chief execs at both MBIA and Ambac took issue with news of the pending downgrades. MBIA CEO Jay Brown questioned why the firms were affirmed in February, only to be on the chopping block again less than six months later.
"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," he said in a press statement released Wednesday.
Ambac CEO Michael Callen questioned the timing of any downgrades as well, saying that the rating agencies were overreacting to what he characterized as "temporary" problems, although he did concede the company is seeing some significant problems in its mortgage-related book of business.
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.