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Wednesday, May 21, 2008

CIFG, MBI, ABK and Moody's: The Computer's Made Us Do It


Wow. Talk about just blowing away your (remaining) credibility…

Moody's Begins Probe on Report Bug Caused Aaa Grades (Update1): “Moody's Investors Service said it's conducting “a thorough review” after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

Some senior staff at Moody's were aware in early 2007 that CPDOs rated Aaa the previous year should have been ranked as many as four levels lower, the FT reported today, citing internal Moody's documents. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.”

OMG. OMG. The implications of that last paragraph are absolutely insane. “Some senior staff at Moody's were aware in EARLY 2007 that CPDOs rated Aaa the previous year should have been ranked as many as FOUR LEVELS LOWER, the FT reported today, citing internal Moody's documents. The firm ADJUSTED SOME ASSUMPTIONS TO AVOID having to assign lower grades, the paper said.”

First they make a mistake they shouldn’t have made. I mean, where were the checks and balances? Where were the reviews? Second, they then take that honest mistake and go criminal with it. Just brilliant. Amazing really.

I see lawsuits… lots of lawsuits in the very near future…

“If it is true, does that mean other products haven't been rated correctly? Will they be downgraded? It could lead to turmoil.” -Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London.

The falling 200 day EMA should provide resistance here. I would expect that this mess puts Moody’s (MCO) under pressure and that prices fall back to support around the $40 area.

Related Blog Posts:
The Dog Ate My Homework (Macro Man)
Defective Moody’s Program Issues Billions of Erroneous AAAs (Naked Capitalism)
My Dog Ate It (Sudden Debt)

CIFG Guaranty's Bond Insurer Ratings Cut to Junk (Update4): “CIFG Guaranty, the bond insurer that lost its AAA ratings in March, was downgraded to below investment grade by Moody's Investors Service, which said the company may become insolvent.

The ratings were cut seven levels to Ba2, two steps below investment grade, from A1 to reflect “the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,” Moody's said in a statement.

Failing to meet the capital threshold may be tantamount to insolvency and lead to the termination of the credit-default swap contracts the company uses to guarantee securities, according to Moody's. CIFG is among bond insurers struggling to maintain capital after expanding beyond their traditional business of municipal insurance to guarantees on collateralized debt obligations, mortgage bonds and other securities that have plunged in value.”

The market didn’t put up much of a fuss when this hit the wires. I really like this part, “Failing to meet the capital threshold may be tantamount to insolvency and lead to the termination of the credit-default swap contracts the company uses to guarantee securities…”

There go somebody’s hedges. Expect more surprise writedowns at some of the bigger banks and brokers.

“CIFG insured $95 billion of debt at year-end, according to its Web site. The new credit ratings, which affect CIFG Guaranty, CIFG Europe, and CIFG Assurance North America, remain under review, Moody's said.”

$95 billion isn’t huge. MBIA (MBI) and Ambac (ABK), now that’s huge. They can’t be far behind. Their CDS’s are already perking up…

“Credit-default swaps protecting against the risk that MBIA and Ambac won't be able to make good on their guarantees and debt payments rose after CIFG's credit rating was reduced.

Contracts on MBIA's bond insurer, the world's biggest, jumped 40 basis points to 815 basis points, London-based CMA Datavision prices show. Ambac rose 39 basis points to 860, according to CMA.”

These guys are quietly circling the drain. I don’t think the market fully appreciates the consequences of MBI and ABK failing.

Monoline Related Posts:
MBIA Reports Scary Earnings; NEGATIVE Revenues
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

5 comments:

Ben Bittrolff said...

Remember, if the rating are are bullshit, what happens to the monolines that wrapped them? >evil grin<

Anonymous said...

"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit."
Gordon Gekko

dasein211 said...

Watch the market jump two hendred points on that crap!! Never ceases to amaze me.

Anonymous said...

it was all those goddamn programmers. They are at fault. We did nothing.

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