MarketWatch: Bond insurer downgrades reignite write-down fears

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Bond insurer downgrades reignite write-down fears
Merrill, Citi and UBS may be exposed as Moody's cuts MBIA, Ambac ratings
By Alistair Barr, MarketWatch


SAN FRANCISCO (MarketWatch) -- Downgrades of the two largest bond insurers rekindled concern Friday that big banks and brokerage firms may have to write down the value of mortgage-related exposures more.

Moody's Investors Service cut MBIA Inc. to A2 from Aaa late Thursday -- a two-notch downgrade bigger than some investors expected. The ratings agency also lowered Ambac Financial from Aaa. Bond insurers, also known on monolines, are important because they guarantee more than $1 trillion worth of securities.

When they're downgraded, all the securities they back get downgraded as well -- potentially meaning a knock-on effect for investment banks and other financial institutions that bought guarantees from bond insurers to hedge mortgage-backed securities and more complex vehicles known as collateralized debt obligations, or CDOs.

Citigroup Inc. cut the value of its exposure to bond insurers by nearly $1.5 billion during the second quarter as credit spreads on companies like Ambac widened, said Gary Crittenden, chief financial officer at the giant bank, on Thursday.

Credit spreads widen when the perceived creditworthiness of a company deteriorates.

"Those credit spreads, while favorable at the beginning of this quarter, have widened significantly in the last few days, particularly for certain companies such as Ambac," Crittenden told analysts during a conference call organized by Deutsche Bank. "That could result in another credit-value adjustment similar to the one that we took last quarter."

Merrill Lynch & Co. bought guarantees from MBIA and other bond insurers to hedge its large CDO holdings.

At the end of the first quarter, Merrill had $8 billion of exposure to bond insurers. The firm has set aside $5 billion as a reserve in case the bond insurers can't pay up, Chief Executive John Thain explained during a conference call with analysts last week. .....(more)

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