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Monday, April 7, 2008

Quiet, Sneaky Little Downgrades: CFC, MBI

After the initial frenzied rally on Tuesday, the rest of the week consisted of quiet trading… and that’s despite Non-Farm Friday. Equities are digesting their recent gains and are settling into a tight trading range. The market doesn’t seem to have noticed some important significant developments… yet.

Moody's CUTS Countrywide Bank rating to "D": “Moody's Investors Service on Thursday cut its bank financial strength rating on Countrywide Bank to "D," or default, citing liquidity issues at its parent, Countrywide Financial Corp (CFC) and Countrywide Home Loans.

Liquidity at Countrywide Financial and Countrywide Home Loans worsened substantially in the first quarter amid continued weakness in residential mortgages and recessionary forces in the U.S. economy, Moody's said in a statement.

The liquidity issues could impair Countrywide Bank's franchise, Moody's Vice President Craig Emrick said in a statement.”

On Thursday, Moody’s smashed Countrywide Bank. “D” is for DEFAULT. This went unnoticed by the markets. However, as always… the devil is in the details:

“The downgrade does not reflect Countrywide's planned acquisition by Bank of America, however, Moody's said. The rating was lowered from "C-minus" but is on review for upgrade pending completion of the Bank of America acquisition, Moody's said.”

What does all this mean? Well, simply put the acquisition MUST go through or you have one fairly large, dead bank. Without Bank of America (BAC), there would be no Countrywide Bank. That is how quickly things have deteriorated. The question is, did Bank of America expect things to get this bad when they made their offer? Does this represent a ‘material’ change? Would this be a way out of the deal for BAC?

“Moody's said it believes Countrywide has the liquidity and capital necessary to operate through the planned closing of the proposed acquisition, which is expected in the third quarter of 2008.”

Remember the sheer panic and fear of a month ago with respect to the monoline insurers like MBIA and Ambac? Quietly, after the close on Friday, Fitch DOWNGRADED MBIA stripping the insurer of its triple-A rating.

MBIA Loses AAA Insurer Rating From Fitch Over Capital (Update5): “Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.

MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said.

Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year.”

Remember the daily bailout and buyout rumors of a couple months ago? What happened to them? Carefully and quietly the media has shifted their attention away from one of the most important links in this credit mess… making it LOOK LIKE, the problems have GONE AWAY. They haven’t.

In fact, things have continued to deteriorate. Even accelerate. Below is the chronology of bond insurers’ credit ratings:

MBIA Inc's (MBI) MBIA Insurance Corp
Feb. 26 - Moody's removes Aaa rating from review for DOWNGRADE, assigns NEGATIVE outlook.
Feb. 25 - S&P removes AAA rating from review for DOWNGRADE, assigns NEGATIVE outlook.
Feb. 5 - Fitch puts AAA rating on review for DOWNGRADE.
Jan. 31 - S&P puts AAA rating on review for DOWNGRADE.
Jan. 17 - Moody's puts Aaa rating on review for DOWNGRADE.
Jan. 16 - Fitch affirms AAA rating with stable outlook.
Dec. 19 - S&P changes outlook on AAA rating to NEGATIVE from stable.
Dec. 14 - Moody's affirms Aaa rating, changes outlook to NEGATIVE from stable.

Ambac Financial Group's (ABK) Ambac Assurance Corp
Mar. 12 - S&P removes AAA rating from review for DOWNGRADE, outlook NEGATIVE.
Mar. 12 - Moody's ends DOWNGRADE review, confirms AAA rating, outlook NEGATIVE.
Mar. 12 - Fitch affirms AA rating, outlook NEGATIVE.
Feb. 25 - S&P affirms, leaves on review for DOWNGRADE.
Jan. 18 - Fitch CUTS AAA rating to AA.
Jan. 18 - S&P puts AAA rating on review for DOWNGRADE.
Jan. 16 - Moody's puts Aaa rating on review for DOWNGRADE.
Dec. 14 - Moody's affirms Aaa rating with stable outlook

Dexia's (DEXI) Financial Security Assurance (FSA)
Jan. 24 - Fitch affirms AAA rating with stable outlook.
Dec. 19 - S&P affirms AAA rating with stable outlook.
Dec. 14 - Moody's affirms Aaa rating with stable outlook.

FGIC Corp's Financial Guaranty Insurance Co
Mar. 31 - Moody's CUTS A3 rating to "Baa3," on review for further DOWNGRADE
Mar. 28 - S&P CUTS A rating to BB with NEGATIVE outlook.
Mar. 26 - Fitch CUTS AA rating to BBB with NEGATIVE outlook.
Feb. 25 - S&P CUTS AA rating to A, on review with developing implications.
Feb. 14 - Moody's CUTS AAA rating to A3.
Jan. 31 - S&P CUTS AAA rating to AA.
Jan. 30 - Fitch CUTS AAA rating to AA.
Dec. 19 - S&P puts AAA rating on review for DOWNGRADE.
Dec. 17 - Fitch puts AAA rating on review for DOWNGRADE.
Dec. 14 - Moody's puts Aaa rating on review for DOWNGRADE.

Assured Guaranty Ltd's (AGO) Assured Corp
Dec. 19 - S&P affirms AAA rating with stable outlook.
Dec. 14 - Moody's affirms Aaa rating with stable outlook.
Dec. 12 - Fitch affirms AAA rating with stable outlook.

Security Capital Assurance's (SCA) XL Capital Assurance
Mar. 26 - Fitch CUTS to BB from A.
Mar. 5 - Moody's puts A3 rating on review for DOWNGRADE.
Feb 25 - S&P CUTS AAA rating six notches to A-minus, remains on review for DOWNGRADE.
Feb. 7 - Moody's CUTS AAA rating six notches to A3.
Jan. 31 - S&P puts AAA rating on review for DOWNGRADE.
Jan. 24 - Fitch CUTS to A from AAA.
Dec. 19 - S&P changes outlook on AAA rating to NEGATIVE from stable.
Dec. 14 - Moody's puts Aaa rating on review for DOWNGRADE.

Radian Group Inc's (RDN) Radian Asset Assurance
Mar. 28 - Moody's affirms Aa3 rating changes outlook to NEGATIVE from stable.
Jan. 31 - S&P affirms AA rating with stable outlook.
Dec. 14 - Moody's affirms Aa3 rating with stable outlook.
Sept. 5 - Fitch DOWNGRADEs to A-plus from AA.

Banque Populaire and Caisse d'Epargne's CIFG Guaranty
Mar. 31 - Fitch CUTS rating to A-minus, outlook NEGATIVE
Mar. 12 - S&P CUTS AAA rating four notches to A-plus, outlook NEGATIVE.
Mar. 7 - Fitch CUTS AAA rating three notches to AA-minus, leaves on review for further DOWNGRADE.
Mar. 6 - Moody's CUTS Aaa rating four notches to A1, outlook stable.
Feb. 25 - S&P affirms, retains NEGATIVE outlook.
Feb. 22 - Moody's puts Aaa rating on review for DOWNGRADE.
Feb. 5 - Fitch puts AAA rating on review for DOWNGRADE.
Dec. 19 - S&P affirms AAA rating with NEGATIVE outlook.
Dec. 14 - Moody's affirms Aaa rating, changes outlook to NEGATIVE from stable.
Nov. 22 - Fitch affirms AAA rating with stable outlook.

ACA Capital Holdings' (ACAH) ACA Financial Guaranty Corp
Dec. 19 - S&P CUTS to CCC from A.

Dollar Money-Market Rate Declines for First Time in Four Days: “The cost of borrowing in dollars for three months fell for the first time in four days, the British Bankers' Association said.

The London interbank offered rate, or Libor, for dollars dropped almost 2 basis points to 2.71 percent today, the BBA said. The comparable pound rate declined for a fifth day, by more than 3 basis points to 5.95 percent. The euro rate was little changed at 4.74 percent.”

Despite five straight up days in equities, it is only now that money market rates have even begun to creep down. The sustainability of this rally is therefore in doubt as financial system stress still remains elevated just below the surface…

7 comments:

john t said...

You don't know how right you are when you call these sneaky downgrades. If it really mattered, no way would Moody's have downgraded CFC. Since the merger will go thru, Ben will make sure of it, this downgrade will be used by Moody's to show how independent they are and that those rating on cdo's and such were not because of large fees but because of reasoned analysis.

Anonymous said...

Doesn't cfc have a bank? Free money!

Ian said...

It would help if you explained the Moody rating system properly. This is a D on the Bank Financial Strength ratings. Does not imply default. Here is the link to what the ratings actually mean. http://www.moodys.com.br/brasil/pdf/BFSR_09_2006.pdf.

This is not a bond rating but a bank rating. Completely different scales

Ian said...

Bank Financial Strength Rating Definitions

A

Banks rated A possess superior intrinsic financial strength. Typically, they will be institutions with highly valuable and defensible business franchises, strong financial fundamentals, and a very predictable and stable operating environment.

B

Banks rated B possess strong intrinsic financial strength. Typically, they will be institutions with valuable and defensible business franchises, good financial fundamentals, and a predictable and stable operating environment.

C

Banks rated C possess adequate intrinsic financial strength. Typically, they will be institutions with more limited but still valuable business franchises. These banks will display either acceptable financial fundamentals within a predictable and stable operating environment, or good financial fundamentals within a less predictable and stable operating environment.

D

Banks rated D display modest intrinsic financial strength, potentially requiring some outside support at times. Such institutions may be limited by one or more of the following factors: a weak business franchise; financial fundamentals that are deficient in one or more respects; or an unpredictable and unstable operating environment.

E

Banks rated E display very modest intrinsic financial strength, with a higher likelihood of periodic outside support or an eventual need for outside assistance. Such institutions may be limited by one or more of the following factors: a weak and limited business franchise; financial fundamentals that are materially deficient in one or more respects; or a highly unpredictable or unstable operating environment.

So D isn't great but not the financial meltdown you are suggesting.

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