As I noted last night, the first “independent analyst” attempt to quantify the scale of a bailout of the bond insurance industry ($200 billion) seemed a tad sensationalistic and over-the-top. I said that $75-125bn sounded more accurate, on the basis of pretty minimal information.
Barclays has completed its own analysis. If the monoline ratings are cut one step, from AAA to AA, $22 billion would be required from the banks immediately. If the ratings are cut 4 levels, to A, $143 billion would be required.
Jan. 25 (Bloomberg) — Banks may need to raise as much as $143 billion to meet regulators’ requirements should rating firms downgrade bond insurers, Barclays Capital analysts said.
Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Banks own $820 billion of structured securities guaranteed by bond insurers, the report said.
“This is a huge amount, but the assumptions we use are also very aggressive,” Fenner-Leitao in London said in a telephone interview. The estimate shows how bank capital could be diminished in the event of significant downgrades, he said.
Fitch Ratings cut New York-based Ambac Assurance Corp. by two levels to AA last week, and Moody’s Investors Service and Standard & Poor’s are reviewing Ambac and MBIA for downgrades, casting doubt on the credit quality of $2.4 trillion of bonds the industry guarantees. Wall Street firms led by Citigroup Inc., Merrill Lynch & Co. and Bank of America Corp. raised $72 billion from investors after reporting more than $133 billion of writedowns and credit losses triggered by the collapse of the subprime mortgage market.
New York’s Insurance Superintendent Eric Dinallo met with executives of banks and securities firms this week to ask them to extend capital to bond insurers and stave off credit rating reductions. The regulator said yesterday its rescue plan will “take some time.”
Ambac rose today amid speculation that billionaire Wilbur Ross will buy the company. A deal may come within the next two weeks, the Evening Standard newspaper in London reported on its Web site.
Fitch is likely to cut the rankings of other bond insurers in the “very near term,” with Financial Guaranty Insurance Co. at greatest risk, Fenner-Leitao wrote in the report.
Of course, MBIA’s credit default swaps are trading to yield approximately 20 percent, which means that the CDS market rates MBIA as below CCC. One week ago, they were trading at 27 percent yield, which is CDS-speak for “halfway-plunged into the bankruptcy abyss.” This is why I can’t be bullish at all yet: there’s no point in buying until the monolines either are resolved or dissolve. Timing the resolution of the monoline situation is an insiders’ game.
So I guess the Egan Jones number is all about how far the bond insurers’ ratings are cut. But it also presumably doesn’t include the possibility of an outside entry into the industry (Buffett) or a private-equity takeover and recapitalization of one of the current ones (eg, Warburg Pincus). But I can’t see how Ambac or MBIA could survive without a massive, horrible government bailout.