MBIA, Ambac, $1 Trillion of Debt, Lose S&P AAA Rating

From Bloomberg News in it’s entirety. This is a HUGE story. This means that Ambac and MBIA will go bust, no doubt. And there will be significant writedowns in Q2 and Q3. Expect to see a major financial institution fail (one that’s bigger than Bear) as a result of the writedowns emanating from this decision. Big, big news.

See Credit Crisis Timeline for updates on writedowns.

MBIA, Ambac, $1 Trillion of Debt, Lose S&P AAA Rating

By Christine Richard

June 5 (Bloomberg) — MBIA Inc. and Ambac Financial Group Inc., the world’s largest bond insurers, had their AAA financial strength rankings cut by Standard & Poor’s, taking with them the ratings on more than $1 trillion of securities they guaranteed.

The ratings were lowered two levels to AA, New York-based S&P said in a statement today. S&P said it would keep the ratings under review pending “clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments.”

Ambac, which pioneered municipal bond insurance in 1971, and MBIA, which followed three years later, are succumbing to a loss of confidence after straying into backing securities linked to subprime mortgages and home-equity loans that are now defaulting at record rates. The companies, which have raised $4.1 billion combined in the past six months to cover potential losses, said yesterday they were unlikely to meet demands for more capital.

“The rating agencies have been plain that capital ratios are a moving target, and with economic and spread conditions getting worse, these downgrades shouldn’t be a surprise,” said Matt Fabian, a managing director at Concord, Massachusetts-based researcher Municipal Market Advisors. “It’s the end of an era.”

The ratings on the holding companies were cut three levels to A from AA for Ambac Financial and to A- from AA- for MBIA. Ambac said it’s disappointed by the actions taken by S&P.

“Our frustration stems, in part, from the ever-changing criteria for AAA financial strength ratings,” New York-based Ambac said in a statement today.

Moody’s Review

MBIA fell to as low as $5.21 and Ambac dipped to as low as $2.26 on the New York Stock Exchange after the downgrade today before rebounding to finish the trading session higher. MBIA, which dropped 15.8 percent yesterday to $5.63, a 20-year low, climbed 41 cents to $6.04 today. Ambac, which fell 17 percent to a record low yesterday, was 13 cents higher at $2.62.

The cuts follow an announcement from Moody’s Investors Service yesterday that it had placed the two companies’ ratings under review for a second time this year. Fitch Ratings downgraded both companies earlier this year.

Moody’s put Ambac and Armonk, New York-based MBIA under review in January, only to affirm MBIA a month later and Ambac in March. Moody’s yesterday said it had placed the ratings back under review for a second time this year, citing “meaningful uncertainty” about Ambac’s ability to regain market share, and “diminished new business prospects” for MBIA.

MBIA Chief Executive Officer Jay Brown and Ambac interim CEO Michael Callen were hired last year largely to fulfill one key mission: save the bond insurers’ Aaa credit ratings. More than $1 trillion of municipal bonds and corporate securities the companies guaranteed depend on those top ratings, as does the capacity for Ambac and MBIA to generate enough new business.

Warburg Investment

MBIA, which counts private-equity firm Warburg Pincus LLC and Martin Whitman‘s Third Avenue Management LLC as its largest shareholders, has plunged 91 percent in the past year. Ambac’s biggest investors, Fidelity Management & Research Co. and Davis Selected Advisers, have watched that stock drop 97 percent.

Warburg Pincus bought 16 million MBIA shares in January at $31 each and about 25 million more at $12.15 in February. The New York-based firm also received warrants to buy additional shares.

MBIA may start a new insurance business with $900 million it raised in February, Brown said. Ambac shareholders have suggested the company stop writing new business and enter a “run off,” where it winds down as policies mature, Doug Renfield-Miller, an executive vice president at the company, said at an investor conference this week.

Ambac said today it has been stepping up efforts to create a new bond insurance unit that would focus “solely on guaranteeing the obligations of both municipal and global public finance.”

Buffett

The companies also face competition from billionaire Warren Buffett’s Berkshire Hathaway Inc., the largest shareholder in credit-rating company Moody’s Corp. Buffett started a new bond insurer in December and is charging more than MBIA and Ambac to guarantee payment on municipal debt while avoiding the CDOs and other securities that jeopardized their credit ratings.

Macquarie Group Ltd., Australia’s biggest securities firm, also plans to form a U.S. bond-insurance company. The Sydney- based company has been in talks with the New York State Insurance Department since April to provide bond insurance in the state, Superintendent Eric Dinallo said in an e-mailed statement today.

California Treasurer Bill Lockyer and Connecticut Attorney General Richard Blumenthal are among officials seeking a change in how Moody’s and S&P rate municipal bonds. States and local governments say they were forced to buy now worthless bond insurance because Moody’s and S&P “knowingly and systematically” ranked municipal issues lower than they should have. reform may negate the need for bond insurance.

To contact the reporter on this story: Christine Richard in New York at [email protected];

Last Updated: June 5, 2008 16:26 EDT