Ambac and MBIA Are Financial Zombies, But Are They Infectious?

Moody's and Standard & Poor's are moving slowly on these downgrades because these companies extend the 'umbrella' of their rating to large portions of the debt markets, including municipal bonds as well as Collateralized Debt Obligations (CDO) packages.

A downgrade of the monoline could have a domino effect on debt packages held as assets by the Wall Street Banks, pension funds, insurance companies and the Federal Reserve as backing for the US dollar in circulation.

Of course we all know that ABK and MBI are not AAA and are headed towards insolvency and probable acquisition for a nominal amount or bankruptcy, but we pretend they are still viable and the highest rated debt in the country.


Moody's says it may cut Aaa ratings of Ambac, MBIA
Bond insurers' shares slump to record lows after ratings agency warning
By Alistair Barr, MarketWatch
Last update: 4:41 p.m. EDT June 4, 2008

SAN FRANCISCO (MarketWatch) -- Moody's Investors Service said Wednesday that it may downgrade the Aaa ratings of Ambac Financial and MBIA Inc. because the bond insurers are being hit harder than expected by the mortgage-fueled credit crunch.

MBIA shares slumped 16% to close at $5.63 after the ratings agency's warning. Ambac dropped 17% to $2.49. Both stocks hit record lows.

"They have no future," said Sean Egan, chief ratings officer at Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers. "They will argue otherwise but as a practical matter they don't have a future."

Egan-Jones has non-investment grade, or junk, ratings on MBIA and Ambac and began downgrading the bond insurers a year and a half ago, he noted.

Bond insurers rely on their top ratings to sell guarantees on various types of debt, including municipal bonds, corporate bonds, mortgage-backed securities and collateralized debt obligations, or CDOs. But the mortgage meltdown and falling house prices have hit them hard, putting those top ratings in jeopardy.

The market lost confidence in the official triple-A ratings of MBIA and Ambac several months ago, making it virtually impossible for the companies to sell new guarantees. Without new business, they are essentially already in "run-off," where insurers stop selling policies and allow their existing book of business to mature and expire, Egan explained.

"It was going to be very difficult anyway, but Moody's announcement today makes it even more difficult for these companies to climb back," he added.

MBIA and Ambac raised billions of dollars in new capital earlier this year to protect their top ratings. But their shares and debt securities are now trading at such depressed levels that it would be very difficult to raise more money now, Egan and others said.

Most likely Aa have weak new business prospects, little financial flexibility and may suffer higher losses on guarantees they sold on mortgage-related securities, Moody's said in a statement.

The agency put the Aaa ratings of MBIA's main bond insurance unit -- MBIA Insurance Corp. -- on review for a possible downgrade. The most likely outcome of the review will be a downgrade to the Aa range. But Moody's also warned that it could cut MBIA to single A.

"We would view the loss of this rating as a significant detriment to MBIA's ability to write new business and raise additional capital," Catherine Seifert, an insurance analyst at Standard & Poor's Equity Research, wrote in a note to clients. "This move, if it comes to fruition, may escalate the downward spiral already underway in MBIA's shares."

Moody's also put the Aaa ratings of Ambac's main bond insurance subsidiary on review for a possible downgrade. The most likely outcome of this review will be a cut to the Aa range, the agency said.

MBIA said it disagreed with Moody's decision and argued that there haven't been any material changes in the company's operating environment that would warrant a downgrade.

"We are surprised by both the timing and direction of this action and can only conclude that the requirements for a Triple-A rating continue to change," said Jay Brown, chairman and CEO of MBIA, in a statement.

The bond insurer raised new capital earlier this year and was planning to funnel $900 million of that from its holding company into its bond insurance subsidiary MBIA Insurance Corp. But the company said on Wednesday that it won't do that now because the original plan was designed to support the unit's triple-A rating.

Jack Dorer, a managing director at Moody's, said MBIA's decision to keep the $900 million at its holding company will be taken into account when deciding whether to downgrade the bond insurance unit.

"In terms of the claims-paying ability of the operating company it is certainly better to have money in the operating company than not," he explained in an interview.

Ambac won't raise new capital

Ambac said it was "disappointed" by Moody's decision, stressing that it's raised $1.5 billion in new capital since March and expects to generate a new capital cushion of $500 million by the end of the second quarter.

The bond insurer also said it's not planning to raise any more new capital.
"The Board and management continue to explore all strategic alternatives and remain confident of the strong business value embedded within our enterprise," the company added in a statement.

Alistair Barr is a reporter for MarketWatch in San Francisco.

Lehman Is Still In Trouble Despite All the Calming Words to the Market

Hint to our non-US readers. In the United States it has recently become culturally acceptable to publicly lie through your teeth if you are covered by the “Safe Harbor” Statement rule under the Private Securities Litigation Reform Act of 1995, or if you are a government functionary and are shaping perception for the good of the American public.

This morning's speech by Fed Chairman Bernanke to the conference on monetary policy in Barcelona was a fine example of shaping perception or 'spin.' Ben was obviously answering some concerns raised by your own government leaders who have heavily invested your national savings in the US dollar and US financial assets. These investments are at a high risk of significant devaluation or default, even moreso than they have seen already.

There is little doubt that Ben is panicking because the weakening dollar and rising commodity prices are bringing the US financial crisis to a new stage that threatens its unsustainable equilibrium. We are experiencing a 'trade shock' which is crippling the real economy. The Fed does not wish to continue to cut rates for the sake of the economy and risk continuing declines in the bond and the dollar. Unfortunately they have few options.

The current US financial situation is not sustainable without continuing massive subsidies of real wealth from non-US sources. It is not being used to correct the problem, merely to sustain the status quo.

They pretend to tell the truth and we pretend to believe them. We have little choice.

Lehman May Need to Raise Capital as Analysts See Loss
By Ambereen Choudhury and Yalman Onaran

June 3 (Bloomberg) -- Lehman Brothers Holdings Inc. may report its first quarterly loss since going public in 1994, increasing pressure on the company to raise capital by selling stock.

The fourth-biggest U.S. securities firm probably will post a second-quarter loss of 50 cents to 75 cents a share, according to analysts at Oppenheimer & Co. and Bank of America Corp. New York-based Lehman holds ``very large, illiquid'' assets and ``we can't rule out equity issuance'' to replenish the balance sheet, analysts at Merrill Lynch & Co. said in a report yesterday.

Lehman may seek as much as $4 billion by selling common stock, the Wall Street Journal reported today, citing unidentified people with knowledge of the matter. The company has raised $6 billion since February amid asset writedowns and losses from the collapse of the U.S. subprime mortgage market. Lehman dropped 48 percent in New York trading this year, the worst performance on the 11-company Amex Securities Broker/Dealer Index.

``This is adding to the perception that there's a need for more write-offs and capital raisings,'' said Greg Bundy, executive chairman of merger advisory firm InterFinancial Ltd. in Sydney and a former head of Merrill's Australian unit.

Lehman spokesman Mark Lane declined to comment. The company's shares were down $1.28 at $32.55 in early New York trading, after falling 8.1 percent yesterday on the New York Stock Exchange.

`Behind Us'

Chief Executive Officer Richard Fuld said at the annual shareholders meeting in April that ``the worst is behind us'' in the credit-market contraction that has cost the world's biggest banks and brokerages more than $387 billion. (Mission Accomplished? - Jesse)

Financial-services firms have been forced to raise $276 billion to cover the losses, according to Bloomberg data. Citigroup Inc., the biggest U.S. bank, has raised the most, pulling in more than $44 billion with a combination of stock sales and private offerings to investment funds controlled by foreign governments including Abu Dhabi.

Lehman Chief Financial Officer Erin Callan said last month at an industry conference in New York that the firm's leverage-- the ratio of assets to equity -- declined to 27 to 1 from almost 32 to 1 at the end of the first quarter. The company needs more capital because of declines in the credit markets, David Einhorn, a hedge fund manager who's betting Lehman shares will fall, said in an interview last week.

Merrill Rating

Standard & Poor's downgraded the credit ratings of Lehman and bigger New York-based competitors Morgan Stanley and Merrill yesterday, saying they may disclose more writedowns for devalued assets. Lehman's credit rating was cut to A from A+, as was Merrill's.

Investors have ``serious concerns that the subprime crisis isn't over at all,'' said Fumiyuki Nakanishi, an equity strategist at Sumitomo Mitsui Financial Group Inc. in Tokyo. (Its not over. What the hell is wrong with you people. Are you delusional? - Jesse)

The S&P downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York, who has a ``market perform'' rating on Lehman.

``Lehman needs to reduce its leverage ratios to reflect the new realities of the fixed-income marketplace,'' Hintz wrote in a report to clients today. ``This will not be good for the firm's revenue base.'' (Lehman was levered up like a hedge fund, moreso than a bank, and was heavily invested in misrated assets. Reckless disregard for risk management and sound investment practice for a bank. - Jesse)

To contact the reporters on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.

Soros Testifying to Congress This Morning about The Oil Bubble

Soros sounds alarm on oil ‘bubble’
By Joanna Chung in Washington
Financial Times
June 3 2008 05:06

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.

He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Mr Soros will tell the Senate commerce committee, according to a draft text seen by the Financial Times.

“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”

The comments by Mr Soros, chairman of Soros Fund Management, a $17bn hedge fund, are likely to fuel a debate about the role of speculators – including hedge funds, pension funds and other institutional investors – in the rising costs of energy and food. The fund declined to comment on its specific market positions.

Regulators and other officials have said surges in oil and commodity prices are mainly due to fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities.

However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.

Mr Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” his prepared remarks say.

“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”

Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.

Chart Updates in the Babson Style For Market Close 2 June 2008