The frantic efforts to prop up the bond insurers may not succeed in staving off future downgrades for the companies.
The Wall Street Journal reports that the latest plans to salvage the monolines are recognising that they may have to settle for less than the triple-A badge which was previously held as crucial to the bond insurers’ business model.
The latest plans would involve putting the companies into “run off” - where insurers cease writing new business, but continue to service their existing portfolio. The banks would then try to find a way to unwind the “toxic” portion of the monolines’ portfolios, namely the CDS on CDOs. The capital raised through the fabled unwinding of those CDS would then be used to help prevent further downgrades.
Confidence in such efforts cannot be high. MBIA for one is pushing ahead with its own capital raising, with new plans to raise $750m in equity, more than it had initially envisaged. Yves Smith is perplexed as to how the unwinding, which is apparently under consideration for Ambac and FGIC, could work. The whole business of writing CDS on heterogenous (and presumably widely held) CDOs looks just too complex.
Plus the figures involved suggest that the kinds of props just won’t cut it. The figures are also largely uncertain. On the capital required to save the monolines AAA ratings, the numbers range broadly between the Bill Ackman estimate at $15bn and an outlying $200bn from rating agency Egan Jones. On the potential losses coming back to the banks as a result of the monolines plight, the range runs from Morgan Stanley’s (we think incredibly rosy) $5bn-$7bn, up to the $70bn which is now being widely cited in reports.
The debate over whether monolines can maintain their triple-A rating is starting to look rather academic. The AAA badge was meant to reflect the cast-iron nature of the monoline guarantee which is now tainted, capital-raising and unwinding schemes regardless. UBS analyst David Havens may argue that the problematic portion of the business amounts to only 5 per cent of the monolines’ assets – but when that slice is enough to collapse the company, its absolute size seems irrelevant.
The other tainted party is of course the rating at the heart of the matter, the supposedly top-notch, ultra-safe triple-A. The agencies have started the fight restore some credibility after months of criticism, but may be fighting a losing battle. Moody’s plans for a numeric system for complex debt ratings, and the possibility of a rating “warning label” got short shrift in the blogosphere. Barry Ritholtz was incensed, while Tanta over at Calculated Risk introduced her own east end-influenced suffix to the AAA label, PONY. Tanta’s version stands for prices always rise, owners occupy all units, nobody lied and your own analysts did all the due diligence. Those unfamiliar with cockney rhyming slang can apply direct to FT Alphaville for our translation of pony.
Will S&P’s more detailed overhaul effort get a better reception? We doubt it. Details to follow but the summary we’ve seen remains uninspiring. “Investor education is key” isn’t going to cut it.