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Readers of this blog have known how useless the guarantees of MBIA and Ambac have been for quite some time. Three of the more recent examples are MBIA and Ambac's Capital in Doubt and Will Ambac and MBIA Survive? and just several days ago Financial Day of Reckoning Approaches.
The realization that guarantees from Ambac and MBIA are worthless is finally dawning on state and local investors as the following Bloomberg headline shows: Muni Insurance Worthless as Borrowers Shun Ambac.
State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.Business Model Broken Beyond Repair
Wisconsin sold $154.6 million of general obligation bonds last month at interest rates usually available only to borrowers with the highest credit ratings. Wall Street firms didn't require the state to insure the bonds, even though Wisconsin is graded four levels below AAA, amid signs that bond guarantors may lose their own top rankings.
"Either the Street or investors didn't see the underlying value of the insurance," Frank Hoadley, Wisconsin's director of capital finance, said in an interview.
Wisconsin, California, New York City and about 300 other municipal issuers sold bonds without buying insurance in recent weeks, avoiding premiums that are as high as half a percentage point of the bond issue, according to data compiled by Bloomberg.
"Taxpayers give insurers $2 billion a year because of a dual-rating scale," said Matt Fabian, senior analyst and managing director of Municipal Market Advisors, an independent municipal bond research firm in Concord, Massachusetts. "You could easily save taxpayers that $2 billion by rating them on the same scale as corporate bonds."
None of the insurers responded to requests for comments.
Look who recently shunned buying recent insurance:
- California decided against insuring $1 billion of borrowings last month because of doubts about whether bond insurance provides any value, said Tom Dresslar, spokesman for California State Treasurer Bill Lockyer.
- New York City, the largest borrower among U.S. cities, decided in November to sell $100 million of uninsured variable- rate demand obligations instead of auction-rate securities, which are usually insured. The city sold the bonds Dec. 4.
- Central Puget Sound Regional Transit Authority, located in Seattle, sold half of a $450 million bond offering in November without backing from a financial guarantor. Some investors said they didn't want the insurance because of doubts raised about the insurers' ability to pay and maintain ratings, said Tracy Butler, treasurer of the transit system.
- Wisconsin, California, New York City and about 300 other municipal issuers sold bonds without buying insurance in recent weeks, avoiding premiums that are as high as half a percentage point of the bond issue, according to data compiled by Bloomberg.
Kiss goodbye any ideas that Ambac and MBIA will raise rates to cover losses. Both can look forward to declining revenues and rising defaults. Over time that will prove to be a lethal combination.
Shameless Pretending By Moody's, Fitch, and S&P Continues
MBIA is admitting a $30.6 billion in CDO exposure causing Morhan Stanley analyst Ken Zerbe to state "We are shocked that management withheld this information for as long as it did." But the interesting is that MBIA states that they Previously Disclosed $30.6 Billion Multi-Sector CDO Exposure.
The information posted on December 19, 2007 discloses no additional Multi-Sector CDO exposure. Standard & Poor's, Moody's and Fitch have confirmed that this information was provided to them and was taken into consideration in their recent ratings analyses. The information was also made available to Warburg Pincus prior to their entering into the previously disclosed Investment Agreement, and that agreement is not affected by this information.That is kind of interesting because it seems to have caught Fitch by surprise as Fitch Places 173,022 MBIA-Insured Issues on Rating Watch Negative.
Concurrent with its related rating announcement earlier today on MBIA Inc. (MBIA) and its financial guaranty subsidiaries, Fitch Ratings has placed 173,022 bond issues (172,860 municipal, 162 non-municipal) insured by MBIA on Rating Watch Negative.Fitch is maintaining the 'AAA' insurer financial strength of MBIA. Exactly what kind of complete nonsense is this? In Downward Spiral of Deep Junk I noted:
Fitch placed MBIA's 'AA' long-term rating and 'AAA' insurer financial strength (IFS) rating on Rating Watch Negative following the rating agency's updated assessment into MBIA's current exposure to SF CDOs backed by subprime mortgage collateral and various CDO-squared transactions, as well as MBIA's exposure to RMBS.
Ambac's swaps implied a rating of "Caa1," seven levels below investment grade and 14 notches below its actual rating.Things have surely worsened for MBIA since then. But the pretending by Moody's, Fitch, and the S&P continues, smack in the face of revenues that anyone can see are going to decline significantly.
MBIA Inc's default swap spreads, meanwhile, are trading as though they carry a rating of "B2," five levels below investment grade, and 12 notches below the company's "Aa2" rating.
As of the November 11 2007 10-Q MBIA had $6.96 billion in working capital. They have guaranteed $30.6 billion in CDOs and have other questionable exposure as well. In the face of all these problems all three credit rating agencies have maintained the AAA rating of MBIA.
In It is now time to downgrade the monoliners Nouriel Roubini writes:
The current charade of pretending that the monoliners are under review to give them time to raise more capital to avoid such a downgrade is another case of rating agencies supporting a rotten business model. The actual behavior of such monoliners has proven that they are not transparent, that they hold or insure a mass of skeletons and toxic waste securities and they have been dishonest in hiding from investors the toxic waste that they hold and insure. So it is time to stop this charade of rating forbearance and admit that the emperor has no clothes: a business model that cannot survive without an AAA rating is conceptually a business model that cannot deserve under any circumstance an AAA rating; period! Arguing otherwise is believing in voodoo black magic.I heartily endorse that viewpoint even as I disagree with Roubini as to what the solution to this mess is. See Missing the Boat on Monetary Easing for my free market solution vs. price fixing schemes elsewhere.
The Charade Of Pretending Will Continue
As long as Moody's, Fitch, and the S&P get paid by the companies whose debt they rate, the charade of pretending will continue. Sadly, it is in the financial best interest for all involved in the scam, for the pretending to go on long as possible.
Rather than getting paid based on the accuracy of reports, government sponsorship of the big three insure they get business no matter how deeply flawed their analysis is. And let's face it, there have been some enormous lapses in judgment by all three to the point of actual fraud investigations into the rating agencies by Ohio attorney general Marc Dann.
So not only are the guarantees of the insurers worthless, so are any ratings made by the big three. Moody's comes flat out and says it themselves.
Moody's Code Of Conduct
"Moody's has no obligation to perform, and does not perform, due diligence." See Fitch Discloses Its Fatally Flawed Rating Model for more on that disclaimer as well as problems at Fitch.
I certainly agree with Moody's assertion of itself. It is perfectly clear Moody's does not perform due diligence. The entire system reeks from the head down and I propose we chop off the head of this beast and Break Up The Credit Rating Cartel.
Unfortunately, all I hear are screams of more government intervention by misguided fools wanting to add another layer of regulation on top of things. These same people expect a government that brought us FEMA, Fannie Mae, a broken Medicaid system, built bridges to nowhere in Alaska, and who wasted $trillions in Iraq, can put in an oversight system for the rating agencies.
Enough already. Government sponsorship of the ratings agencies created the problem. The solution is simple: Government unsponsorship of the ratings agencies.
Mike "Mish" Shedlock
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