Moody's Takes the Axe to Ambac, Again
Those with a memory for the current credit crisis may recall the brouhaha caused by downgrades to monoline bond insurers a few months back. Moody's Investors Service reminded markets on Wednesday evening that the monoline crisis hasn't yet passed, downgrading Ambac Financial Group, Inc. (ABK) and core insurer financial strength ratings of its financial guaranty subsidiaries after the company posted a $2.4 billion Q3 loss earlier in the day. The insurer cited worsening conditions in the private-party RMBS market as largely responsible for the quarterly loss. The rating agency cut Ambac's U.S. financial guaranty business' insurer financial strength rating from Aa3 to Baa1, a four-notch downgrade that now leaves the company two notches above junk status. The debt ratings of Ambac Financial were also cut similarly. Moodys' said the downgrades reflected "Ambac's diminished business and financial profile resulting from its exposure to losses from US mortgage risks and disruption in the financial guaranty business more broadly," in a statement. Insurers like 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 tanked insurers’ ratings, and escalated the expected amount of claim losses tied to deals they insured. As a result of the downgrades, the Moody's-rated securities that are guaranteed or "wrapped" by Ambac are also downgraded to Baa1 -- downgrades that will hit RMBS and CDO deals the company insures. While the downgrade was the result of many factors, Moody's made it clear that mortgage exposure was first and foremost on its mind. Ambac reported incurred losses of $608 million on financial guaranty policies, primarily related to direct RMBS exposures, and $2.5 billion of credit-related impairments on credit default swaps referencing ABS CDOs. The result was what Moody's characterized as a "significant reduction" in regulatory capital. At HousingWire, we noted that much of the collateral underlying subprime transactions in the secondary mortgage market has begun deteriorating (again), and these declines are likely to pressure the same players that reeled from the first round of deterioration in this sector. Ambac's new-found woes would seem to be the second act in just this sort of tragic drama. Write to Paul Jackson at firstname.lastname@example.org. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.