Friday, January 18, 2008

You Should Worry About Ambac -

Global warming, bird flu, and terrorism not enough for you? Here is something else to worry about! Bond insurers may be facing downgrades. How big of worry? It is easy enough to see a downgrade, but a default is significantly less likely (albeit possible). And if it were to happen, the mere size of their positions (true they are measured in notional principles) is staggering. A look in from Forbes

You Should Worry About Ambac -
"Bond insurers use their top credit ratings to insure bonds issued by municipalities and others against default. That makes it easier for the issuers to sell the bonds at an attractive rate to institutional investors, like pension funds.

In recent years, Ambac, MBIA (nyse: MBE - news - people ) and others have ventured into insuring credit derivatives and other relatively newfangled fixed-income products invented by and peddled by Wall Street. Ambac guaranteed $38 billion of debt linked to subprime mortgages and has exposure to $45 billion of other mortgage guru Bill Gross of Pacific Investment Management calls banks' participation in the CDS market a ponzi scheme that may trigger losses of $250 billion.

Bank disclosure is sketchy, and the market is hard to evaluate for lack of information. Credit default swaps are sold over the counter, are not traded on an exchange and are outside the close scrutiny of regulators.

'The ultimate systemic risk caused by the weakened positions of the monoline insurers is overwhelming and scary,' said CIBC World Markets analyst Meredith Whitney in a late-December research note. 'The impact will be sizable and very negative for the banks.'"

Uh great. Might be time for yoga. ;)

No comments: