Citigroup, Merrill Lynch, Royal Bank of Scotland and Union Bank of Switzerland.
The list is far too modest. Once the dominos start falling it will spread in a much further circle of financial destruction, as this massive derivatives market is so interwoven with contingencies. Perhaps a 'chain reaction' might be a more appropriate metaphor.
We suspect not one investment bank would have been left standing had the Fed not intervened as it had done with half of the net worth backing the US currency.
We are not saying they ought not to have intervened. Rather, we are saying their intervention was clumsy, overgenerous, and done on top of a decade of making excuses and helping the problem reach critical mass.
Bond insurer downgrades reignite write-down fears
Merrill, Citi and UBS may be exposed as Moody's cuts MBIA, Ambac ratings
By Alistair Barr, MarketWatch
1:34 p.m. EDT June 20, 2008
SAN FRANCISCO (MarketWatch) -- Downgrades of the two largest bond insurers rekindled concern Friday that big banks and brokerage firms may have to write down the value of mortgage-related exposures more.
Moody's Investors Service cut MBIA Inc. to A2 from Aaa late Thursday -- a two-notch downgrade bigger than some investors expected. The ratings agency also lowered Ambac Financial.
Bond insurers, also known on monolines, are important because they guarantee more than $1 trillion worth of securities.
When they're downgraded, all the securities they back get downgraded as well -- potentially meaning a knock-on effect for investment banks and other financial institutions that bought guarantees from bond insurers to hedge mortgage-backed securities and more complex vehicles known as collateralized debt obligations, or CDOs.
Citigroup Inc. cut the value of its exposure to bond insurers by nearly $1.5 billion during the second quarter as credit spreads on companies like Ambac widened, said Gary Crittenden, chief financial officer at the giant bank, on Thursday.
Credit spreads widen when the perceived creditworthiness of a company deteriorates.
"Those credit spreads, while favorable at the beginning of this quarter, have widened significantly in the last few days, particularly for certain companies such as Ambac," Crittenden told analysts during a conference call organized by Deutsche Bank. "That could result in another credit-value adjustment similar to the one that we took last quarter."
Merrill Lynch & Co. bought guarantees from MBIA and other bond insurers to hedge its large CDO holdings.
At the end of the first quarter, Merrill had $8 billion of exposure to bond insurers. The firm has set aside $5 billion as a reserve in case the bond insurers can't pay up, Chief Executive John Thain explained during a conference call with analysts last week.
"The trouble for the banks is that the protection provided by the monolines becomes 'less effective' as the credit ratings of the monolines are downgraded," said Simon Adamson, an analyst at CreditSights.
"In other words, the probability that the monolines will pay out on the contracts decreases," he wrote in a note to clients on Wednesday.
In Europe, UBS AG and Royal Bank of Scotland have disclosed large exposures to bond insurers, according to Adamson.
Alistair Barr is a reporter for MarketWatch in San Francisco.
