Sunday, February 3, 2008
the Symbotic Relationship between Bond-rating firms and Bon insuers
--If the bond insurers are downgraded, Wall Street could face an additional $40 billion to $70 billion in losses on top of the $100 billion it has already suffered. --The crisis illustrates the symbiotic relationship between the bond-rating firms and the bond insurers, which include Ambac and the No. 1, MBIA Inc. This relationship proved very lucrative during the boom time for the housing market, but now their interests are diverging, and the resulting spiral could lead to billions more in losses. --The relationship changed last year when major ratings firms began to raise their estimates of losses for securities backed by subprime mortgages. The firms, Moody's Investors Service, a unit of Moody's Corp.; McGraw Hill Cos.' Standard & Poor's, and Fimalac SA's Fitch Ratings, had given many of these securities their top, triple-A, rating. --But when securities they've insured are deemed more risky, that can force the bond insurers to set aside more capital. And if they don't have it and can't get it, the insurers are at risk of losing their own triple-A ratings, which are essential for their business. --This threat has loomed larger as the ratings firms' view of the housing market worsened, and they lowered their ratings on even more securities tied to mortgages, including those insured by the bond insurers. And when that happens, bond insurers effectively had to put up more capital for the bonds they were holding. Moody's prepared investors for bond-insurer downgrades in a research note Thursday and subsequent investor call Friday.