Moody’s downgrading of MBIA and Ambac should be a cathartic event.
It means that the companies - in current form - will not write business ever again.
MBIA has been downgraded all the way to A2. It. is. not. a. viable. bond. insurer. Why? Well for a start, the underlying ratings on most of the bonds MBIA wraps - certainly the muni ones - are in many cases already better than that.
Ambac is at Aa3, which isn’t much better. Why would you pay to have your bond guaranteed at Aa3 when - put simply - Warren Buffett can do it AAA? Everything else should - theoretically - be moot.
None of the above, however, stops MBIA’s management from treading water - and involving themselves in a war of words between the great and the good of the blogosphere. A bit of background to all this, here, but in polar terms, of the heavyweight bloggers, Felix Salmon has been in the monoline’s corner, while Yves Smith has been on the attack.
As FT Alphaville noted yesterday, it’s now clear that - pace NYT - Eric Dinallo and the NYSID are fairly limited in the scope of the regulatory actions they can take against the monolines. The risk being that in doing anything, Dinallo may trigger termination clauses in CDS contracts and cause a run from policyholders.
So the issue is if Dinallo need do anything. If he did need to step in, then MBIA’s decision to withold $900m at the holding company level - the subject of a tangential debate between Smith and Salmon - would suddenly be relevant once more, since it would be needed - perhaps - to meet termination charges caused by desperate policyholders.
It’s been said that policyholders wouldn’t run on the bond insurers -the comparison being made to ACA. But as Yves Smith points out, comparisons to ACA are something of a canard.
Banks granted a stay on ACA contracts because otherwise ACA would go bankrupt: ACA had defaulted on huge margin calls on CDS on CDOs. If the banks didn’t waive those margin calls, and ACA went bust, then the swaps written with ACA - used to hedge huge CDO positions on the banks balance sheets - would be worthless. Resulting in massive writedowns.
In the case of MBIA and Ambac, we’re not talking about bankruptcy or margin calls. Indeed in many cases, the value of the insurance written is already worthless - in the case of MBIA, many wrapped bonds have an underlying rating now higher than the wrapper. Policyholders, in other words, have everything to gain from terminating the insurance contracts.
The ball then, is in Dinallo’s court. Anything MBIA or Ambac say is smoke and mirrors. The situation is out of their hands.
And the major factor weighing on Dinallo’s mind will be the solvency - and regulatory capital adequacy - of MBIA and Ambac. The NYSID spoke at length to Felix Salmon. Here’s some of what they said:
We think there’s enough money to pay all the claims based on what the current expected losses are. Things have deteriorated a little bit, but whatever gauge you want to use, the current claims-paying resources in the industry for MBIA and Ambac are going to be sufficient to pay all the losses on the policies they wrote.
Cause for succour? No. Because “current expected losses” are on an upward trend. And what is the prime mover behind that trend? RMBS performance.
The rating agencies hold all the cards here: for once - ironically - they are leading indicators.
