by Calculated Risk on 11/10/2009 01:35:00 PM

From the Ambac 10-Q:

While management believes that Ambac will have sufficient liquidity to satisfy its needs through the second quarter of 2011, no guarantee can be given that it will be able to pay all of its operating expenses and debt service obligations thereafter, including maturing principal in the amount of $143,000 in August 2011. In addition, it is possible its liquidity may run out prior to the second quarter of 2011. Ambac is developing strategies to address its liquidity needs; such strategies may include a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding. No assurances can be given that Ambac will be successful in executing any or all of its strategies. If Ambac is unable to execute these strategies, it will consider seeking bankruptcy protection without agreement concerning a plan of reorganization with major creditor groups.
emphasis added

Apparently the Wisconsin Commissioner of Insurance will rule on Ambac’s statutory capital by November 16th. (ht JA)

And from Freddie Mac's 10-Q:

We have institutional credit risk relating to the potential insolvency or non-performance of mortgage insurers that insure single-family mortgages we purchase or guarantee. As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its obligations to reimburse us for claims. If any of our mortgage insurers that provides credit enhancement fails to fulfill its obligation, we could experience increased credit-related costs and a possible reduction in the fair values associated with our PCs or Structured Securities.
...
Based upon currently available information, we expect that all of our mortgage insurance counterparties will continue to pay all claims as due in the normal course for the near term except for claims obligations of Triad that are partially deferred after June 1, 2009, under order of Triad’s state regulator. We believe that several of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could threaten our ability to receive future claims payments, and negatively impact our access to mortgage insurance for high LTV loans. Further, one or more of these mortgage insurers, over the remainder of 2009 or in the first half of 2010, could lack sufficient capital to pay claims and face suspension under Freddie Mac’s eligibility requirements for mortgage insurers.

More from MarketWatch: MBIA loses $728 million as slowdown hits bond insurer

The zombie watch continues ...

by Calculated Risk on 9/28/2009 08:38:00 PM

From Reuters: S&P cuts MBIA, MBIA Insurance as losses continue

Standard & Poor's on Monday cut its ratings on MBIA Inc and its structured finance insurance arm, MBIA Insurance Corp, citing an expectation the company will continue to take significant losses from insuring risky loans. ... The outlook for both companies is negative ...

From S&P:

We downgraded MBIA and the holding company because macroeconomic conditions continue to contribute to losses on the group's structured finance products. Losses on MBIA's 2005-2007 vintage direct RMBS and CDO of ABS could be higher than we had expected. However, the downgrade also reflects potentially increased losses in other asset classes, including but not limited to CMBS and--for other years prior to 2005--within RMBS.
...
The negative outlook on MBIA and the holding company reflects our view that adverse loss development on the structured finance book could continue. In the next few years, liquidity will likely be adequate to meet debt-service and holding-company obligations (including operating expenses). However, increased losses and earnings volatility could still occur. ... Considering the runoff nature of the franchise, it is unlikely that we would raise the rating. Alternatively, if there were increased losses within the investment portfolio, potential reserve charges, or diminished liquidity, we could take a negative rating action.
emphasis added

There is still significant counterparty risk for the banks from both MBIA and Ambac.

by Calculated Risk on 6/15/2009 07:48:00 PM

From the WSJ: Banks Challenge N.Y. Insurance Regulator Over MBIA Split

A group of large banks stepped up their fight against MBIA Inc.'s decision to split its businesses, filing a petition claiming the New York State Insurance Department had no right to approve the move.

The banks contend the move benefited some policyholders at the expense of others.

The 18 financial institutions, which include Barclays PLC., Bank of America Corp. and J.P. Morgan Chase & Co ...

The New York State Insurance Department earlier approved MBIA's restructuring plan to split its municipal-bond insurance business from its mortgage-backed securities insurance business. Many banks and hedge funds bought MBIA insurance on their structured product portfolios, and they are concerned about the financial strength of the MBS insurance business (and whether they will be paid or suffer further losses).

by Calculated Risk on 3/12/2009 05:20:00 PM

A couple of mortgage insurer stories ...

From the WSJ: MBIA's Split of Businesses Raises Ire of Banks, Hedge Funds

Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies...

The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond insurance business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own ... These institutions were left holding contracts with a financially weaker insurer when MBIA transferred about $5 billion in capital from its main unit to another company that guarantees only U.S. municipal bonds.

And from Dow Jones (no link): MGIC Dn 35% As Payment-Deferral Points To Liquidity Issues

MGIC Investment Corp. ... said in a late-Wednesday regulatory filing it deferred its interest payment on some debentures by 10 years.

The filing, which revealed MGIC is likely having liquidity issues ...

... Fitch Ratings put its credit ratings on MGIC and two of its units on watch for possible downgrade Thursday. ... Mortgage insurers such as MGIC cover potential lender losses on loans to borrowers who can't come up with a 20% down payment. The sector continues to struggle with soaring claims and declining new business ...

Actually the mortgage insurers were lucky - they were cut out of the worst deals because Wall Street happily securitized 100% financing with 2nds and no MI. But the losses are still piling up. And so are the counterparty risks ...

by Calculated Risk on 11/07/2008 05:57:00 PM

From Reuters: Moody's cuts MBIA Insurance to "Baa1"

Moody's Investors Service on Friday cut its ratings on MBIA insurance arm and also sent ratings on the holding company's debt into junk territory, citing diminished business prospects and a weaker financial profile.

This follows a rating cut for AMBAC earlier this week.

by Calculated Risk on 11/05/2008 04:51:00 PM

Ambac and MBIA are back in the news ...

From Bloomberg: MBIA, Ambac Losses Widen on Higher Claims Forecast

MBIA Inc. and Ambac Financial Group Inc., the bond insurers crippled by credit-rating downgrades, posted wider losses than analysts anticipated ...

MBIA ... reported a $806.5 million net loss after setting $961 million aside for guarantees on home-equity loan bonds. Ambac fell 41 percent as it recorded a $2.43 billion net loss after reserving $3.1 billion.

"The big issue for bond insurers is their ratings," said Jim Ryan, an analyst with Morningstar Inc. in Chicago. "If the rating agencies pile on, that could create more problems."

And right on cue from MarketWatch: Moody's cuts Ambac to 'Baa1'; outlook developing

Paul Jackson at HousingWire adds: Ambac Posts $2.4 Billion Q3 Loss on “False” MBS Recovery

In an investor presentation, Ambac said that second quarter RMBS trending among private-party transactions it had insured — which had initially turned upward earlier this year — has since proven to be the latest example of a “false positive” in battered mortgage securities markets.
...
Ambac expressed hope that the Treasury’s TARP program and capital purchase program would “establish a floor for housing market fundamentals,” according to its investor presentation. The insurer has asked Treasury to consider guaranteeing a portion of its structured securities portfolio, as well.

I think it is absurd to hope that the TARP will "establish a floor for housing market fundamentals". Hope is not a plan.

Note: just to be clear "Hope is not a plan" is a phrase I've used for at least 30 years ... and was not intended as a swipe at President-elect Obama.

by Calculated Risk on 9/19/2008 02:44:00 PM

Lost in the shuffle, Moody's announced last night: Moody's places Ambac and MBIA on review for possible downgrade (no link)

Moody's Investors Service has placed the Aa3 insurance financial strength rating of Ambac Assurance Corporation (Ambac) and the A2 insurance financial strength rating of MBIA Insurance Corporation (MBIA) on review for possible downgrade. Today's rating action follows Moody's announcement of an upward revision to cumulative loss projections for subprime RMBS exposures ...

From MarketWatch: Ambac, MBIA fall as Moody's warns it may cut again

by Calculated Risk on 8/08/2008 05:45:00 PM

From Bloomberg: ACA Terminates $65 Billion of Credit-Default Swaps (hat tips Sam & Brian)

ACA Capital Holdings Inc. ... terminated $65 billion in credit-default swap contracts and turned over most of the company to creditors.

Counterparties now own a 95 percent residual interest in New York-based ACA Capital's insurance unit through surplus notes, the company said in a statement today.

by Calculated Risk on 7/04/2008 09:37:00 AM

From the Financial Times: UBS confirms facing further write-downs

UBS on Friday confirmed it faced further heavy write-downs on exposures to troubled US credits, meaning earnings for the second quarter would be “at or slightly below” break even.

Europe’s biggest casualty of the US subprime crisis did not quantify its latest write-downs, which analysts have estimated at up to $7.5bn.
...
UBS said its latest write-downs had stemmed from the effect of “further market deterioration” on previously disclosed positions, particularly adjustments to the value of its exposures to monoline insurers.

Although UBS warned again, the good news is the write downs will probably not be as large as feared, and UBS also said it has no need to raise additional capital.

Note the exposure to monoline insurers. Counterparty risk will be a theme at the big banks this quarter.

by Calculated Risk on 6/27/2008 08:57:00 AM

From CNBC: Merrill Likely to Write Down $3 Billion-$5 Billion

Reuters is reporting: Merrill may take $5.4 bln in Q2 writeoffs: Lehman

Merrill Lynch will likely incur $5.4 billion of write-downs in the second quarter, mainly from its exposure to monolines, said an analyst at Lehman Brothers ...

Here comes another round of visits to the confessional!

by Calculated Risk on 6/20/2008 05:30:00 PM

UPDATE: from Yves Smith at Naked Capitalism: MBIA Downgrade Increases Collateral Requirements; Clarification on CDS Acceleration in Insolvency/Custodianship

MBIA Comments on the Impact of the Moody's Downgrade

As a result of the downgrade to A2, MBIA expects that it will require $2.9 billion to satisfy potential termination payments under Guaranteed Investment Contracts (GICs). In addition, MBIA expects to be required to post approximately $4.5 billion in eligible collateral to satisfy potential collateral posting requirements under GIC's as a result of the downgrade. MBIA Inc. has total assets of $25 billion related to its ALM business, of which $15.2 billion is available to satisfy these requirements including approximately $4.0 billion in cash and liquid short-term investments; $1.0 billion of unpledged eligible collateral on hand; and approximately $10.2 billion of other unpledged diversified securities with an average rating of Double-A. In addition, MBIA Inc. also has available another $1.4 billion in cash, including the proceeds of its recent equity offering.

by Calculated Risk on 6/19/2008 06:11:00 PM

Headlines and short story only now from MarketWatch:

Moody's downgrades MBIA to 'A2' from 'Aaa'
Moody's downgrades Ambac to 'Aa3' from 'Aaa'

Here come some more write downs for the banks associated with counterparties being downgraded.

by Calculated Risk on 6/11/2008 09:24:00 PM

Press Release: MBIA Issues Letter to Owners.

Most of the news stories today focused on MBIA's announcement that it won't make a planned $900 million capital contribution to MBIA Insurance Corporation. But I also found this comment in the letter interesting:

[B]ased on our discussions with the rating agencies and in trying to think about their challenges, what I believe has really changed in the past three months is that both Moody’s and S&P have far less comfort in forecasting a worst case housing-related stress case loss scenario ...

I'm not surprised that Moody's and S&P feel less comfortable forecasting a worst case for housing - every time they've made a forecast, the housing market has surprised to the downside.

by Calculated Risk on 6/09/2008 09:43:00 AM

From Bloomberg: Citigroup, Merrill, UBS Face Further Writedowns, Whitney Says

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney.

More visits to the confessional coming ...

by Calculated Risk on 6/05/2008 02:23:00 PM

From S&P: Ambac, MBIA Financial Strength Ratings Lowered

Standard & Poor's Rating Services today lowered its financial strength ratings on Ambac Assurance Corp. and MBIA Insurance Corp. to 'AA' from 'AAA' and placed the ratings on CreditWatch with negative implications.

The ratings on the holding companies, Ambac Financial Group and MBIA Inc., have also been lowered to 'A' and 'A-' from 'AA' and 'AA-', respectively, and placed on CreditWatch with negative implications.

The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility. In addition, we believe continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO structures will place increasing pressure on capital adequacy.

by Calculated Risk on 6/04/2008 12:57:00 PM

From AP: Moody's may downgrade Ambac, MBIA ratings (hat tip Nemo, Juan)

Haven't we been here before?

by Calculated Risk on 5/20/2008 03:27:00 PM

From Bloomberg: CIFG Guaranty's Bond Insurer Ratings Cut to Junk (hat tip DD49)

CIFG Guaranty, the bond insurer that lost its AAA ratings in March, was downgraded to below investment grade by Moody's Investors Service, which said the company may become insolvent.

The ratings were cut seven levels to Ba2, two steps below investment grade, from A1 to reflect ``the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,'' Moody's said in a statement.
...
``CIFG demonstrates the cliff-like nature of these events,'' said Thomas Priore, chief executive officer of hedge fund Institutional Credit Partners LLC in New York. ``Depending on the language in the credit-default swap, it can set off a chain of events that creates a complete unwind of the company.''

From AAA to Junk in two months! Yeah, I'd call that Cliff Diving.

by Calculated Risk on 5/13/2008 04:56:00 PM

From Bloomberg: MBIA, Ambac Losses Elevate Aaa Concern, Moody's Says

MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said.

The first-quarter losses reported by the companies in the past two weeks elevate ``existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's, unit of Moody's Corp., said in a statement today.

Moody's also issued a report today on second liens: U.S. Subprime Second Lien RMBS Rating Actions Update (no link). Moody's noted that losses to date have "greatly exceeded" their expectations, and Moody's increased their loss projections:

... Moody's has increased its loss projections on loan pools backing recent vintage subprime second lien RMBS in light of their continued poor performance. Moody's expects 2005 vintage subprime second lien pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average.

Ouch!

by Calculated Risk on 5/12/2008 04:05:00 PM

Just like AMBAC, MBIA has forensic experts reviewing individual loans, and they believe they have a "case for material financial compensation". From the conference call:

"The loss of numbers assume zero recovery from any type of remediation. I do not believe that will be the result. For those of you aware of our remediation history, we intend to remediate the deals as vigorously [as we have in the past] -- we have had teams of forensic experts reviewing loans examining whether they should have qualified to have been included in the insured exposure in the first place. We have a case for material financial compensation based upon the diligence we have performed so far."

Other comments (from reader Brian):

"They spent a lot of time on their home equity line of credit (HELOC) and closed-end second-lien (CES) residential mortgage-backed securities (RMBS) portfolio. Of $18.8B portfolio (77% of which was originated in 06/07), 57% or $11.B have loss reserves associated with it. These RMBS deals have cumulative loss expectations generally in the range of 15-35% with a few outliers of 40-60%. They have taken $1.1 B in reserves to date. The originators for their book were Countrywide 55%, Rescap 28% and IndyMac 6% - pretty much a murderer's row of mortgage underwriters!

They also disclosed in the Q&A that they have $50MM of exposure to Vallejo, CA just to put the icing on the cake."

by Calculated Risk on 5/12/2008 09:39:00 AM

From Bloomberg: MBIA Posts Loss of $2.4 Billion as CDO Slump Deepens

MBIA Inc. ... posted a net loss of $2.4 billion as the slump in mortgage securities deepened.

The beat goes on.