Rumours that American mortgage giant Countrywide was bust on Tuesday proved to be unfounded. That, of course, didn’t stop the share price sliding 34 per cent.
Obviously that’s bad for Countrywide. But Yves Smith at Naked Capitalism points us towards another consequence of the rumour mill: bond insurers MBIA and Ambac Financial – the world’s largest – also had a dreadful day. MBIA was down 21 per cent and Ambac dropped as much as 22 per cent.
No prizes for guessing why. A Countrywide bankruptcy would be the coup-de-grace for the monoline bond insurance industry, delivering up, as it would, a cataract of insurance claims. According to this chart buried on Ambac’s website, they insure $20bn of subprime securities backed by Countrywide originated mortgages. MBIA insures around $1bn of Countrywide subprime deals.
Morgan Stanley, reports Bloomberg, also had a report out on Tuesday issuing an earnings warning on the monolines.
All of which, of course, severely imperils chances of a bailout. MBIA and Ambac have been told by Fitch that they need to raise $1bn in capital by the end of the month, or else face downgrade.