Just when the worries about AIG have receded from the fore, the longer-standing insurance bugaboos, MBIA and Ambac, may return to center stage. From the Financial Times:
Moody’s Investors Service has increased its projections for losses on residential mortgage-backed securities, a move that could result in “multi-notch” credit rating downgrades for bond insurers such as Ambac and MBIA which have exposure to these securities.
In its latest update on losses expected on mortgages made in 2006, Moody’s said it had increased its projections for cumulative losses to an average of 22 per cent. The losses are expected to increase in every quarter, averaging 17 per cent for the first quarter of 2006 and 26 per cent for the fourth quarter of that year….
“Moody’s updated estimated of 2006 subprime losses represents a significant increase above the level previously projected, and now exceeds the average stress case level that has been used in Moody’s assessments of financial guaranty insurers,” the ratings agency said in a statement.
For securities backed by mortgages made in 2007, loss assumptions are “roughly one-third more severe than for 2006”
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Yves,
If yah get a sec, look here! It may be OT here, but worth a look IMHO.
www1.worldbank.org/finance/assets/images/sysbank.dot
Lots of good stuff like this: More generally, most bank recapitalizations in developing countries using public resources failed, with one recapitalization following another. Efforts mainly fixed balance sheets, with little attempt to correct the underlying problems. Repeated recapitalization led to moral hazard; with an implicit government guarantee there was little incentive for prudential banking. Hungary, for example, had to recapitalize its banks several times before it got it right.
Distressed loans may be taken over by governments at their face value (less any provisions). To the extent that banks under-provision (which is often), the government will provide support accordingly. Contingent arrangements are also possible. In Chile, government purchases of non-performing loans was conditional on existing shareholders repurchasing those loans from future profits (Box 8). In Mexico, recapitalized banks bore 25 percent and government 75 percent of losses on non-performing loans, preserving some incentive for banks to manage and recover on these loans. In the end, non-performing claims continued to mount up (and the government is now the largest holder of financial assets in Mexico, but provides no intermediation) and corporations have not been restructured sufficiently by banks.
In other countries, Korea, for instance, share ownership is more diffuse and no particular party can be tapped for new capital. Korean banks may have to be directly recapitalized—as indeed has been done with some banks—even if it means largely diluting existing shareholders out of existence. Government will then have to assume responsibilities of ownership and restructuring, until the bank can be sold to strategic investors with sufficient capital and expertise to manage it. In other countries, particularly Indonesia, long-standing connections between bank and corporate owners (often the same) have undermined the efficient allocation of resources. Existing and controlling shareholders are, therefore, less preferable as long-run owners, and arrangements will likely have to be made attract new capital, including foreign investm
It’s a death spiral leading to a black hole. It’s the over the counter derivatives that are being valued (behind the scenes). Give it a couple of weeks to see the results.
There is no comparison to this meltdown.
Good find, doc
What a difference 8 months makes. I was watching the news hourly in January to see the credit rating agencies finally act on MBIA/Ambac. At the time this was tantamount to a systemic meltdown. Over $1tn of bonds losing their AAA rating!
So much water (and financiers blood) has passed under the bridge since then that, today, it feels like the bond insurers could just evaporate – and few would notice.
Nevertheless, this is still another slide down the precipice to another crumbly ledge. No going back now…
Call Ben or Hank.