Thursday, 12 June 2008

Banks Face Losses From Monoline Downgrades

As mentioned numerous times here the AAA rating given to the monoline insureres from the major rating agencies has been nothing but a sham. That sham ended last week when both Moody's and S&P downgraded both companies to AA. However even AA is far too generous to these two businesses that have no business going forward.

The good news is that the stockmarket hardly reacted when the downgrade happened. A Back in January this would have been seen as a disaaster by the market - perception is everything. However despite the muted response from the market there are some very real consequences for some of the major banks. From Bloomberg:

Citi, Merrill, UBS Face Monoline Losses, Whitney Says

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post losses of $10 billion on bond insurance after MBIA Inc. and Ambac Financial Group Inc. lost their top credit ratings, Oppenheimer & Co. analyst Meredith Whitney said.

MBIA and Ambac, the world's largest bond insurers, had their AAA ratings cut two levels by Standard & Poor's June 5, which trimmed ratings on more than $1 trillion of securities they guaranteed. The downgrades may limit the so-called monoline insurers' ability to write new policies, putting further pressure on earnings, she wrote today in a note to investors.

``The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the subprime-related securities provided to the banks and brokers,'' Whitney wrote. ``The collateral damage could be in excess of an additional $10 billion.''

Whitney, one of the first bank analysts last year to gauge the depth of the U.S. credit crisis, said in January that losses tied to the bond insurers for all banks might top $40 billion. She didn't update her estimate. Citigroup, Merrill and UBS have taken more than $10 billion of writedowns related to the insurers, she wrote.

Citigroup, the biggest U.S. bank, and Merrill, the world's biggest brokerage, have ``underperform'' stock ratings from Whitney. Both companies are based in New York. She doesn't cover Zurich-based UBS, the European bank hardest hit by the U.S. subprime contagion.

UBS had $6.3 billion of ``exposure'' to bond insurers at the end of March, Whitney said. Citigroup had $4.8 billion and Merrill had about $3 billion, she wrote.

Citigroup rose 12 cents to $20.18 at 11:31 a.m. in New York Stock Exchange composite trading, Merrill Lynch fell 28 cents, or 0.7 percent, to $38.74, and UBS slid 80 centimes to 23.82 francs in Zurich trading.

Whitney has been way out in front of the pack in her analysis of the effects on the major banks during the credit crunch so I wouldn't bet against her $40 billion estimates. More writedowns are on the way.