Bond Insurers Fight To Keep Triple-A Ratings

As troubled bond insurers like MBIA and Ambac fight to maintain their triple-A ratings, officials at these firms are pondering how their businesses might look if they do indeed get downgraded.

The decision by the big ratings agencies, Moody’s, Standard & Poor’s and Fitch is imminent, and at least one of the raters could make an announcement sometime today.
Bond insurers guarantee bonds held by investors from default, agreeing to pay interest and principle if the issuer doesn’t do so. But maybe more important to investors is that insurers also lend their triple-A rating, the highest rating in the bond market, to the bonds as part of their insurance package.

People inside the New York State insurance department, which has taken the lead in trying to prop up the insurers, say both MBIA and Ambac have enough assets to cover losses stemming from their insurance of depressed collaterialized debt obligations, or CDOs, held by large banks like Citigroup.

The bigger question is whether these firms can compete with ratings less than triple-A, particularly now that the bond insurance business will be focusing on covering bonds of municipal governments. Many large investors of municipal debt can only hold securities with triple-A ratings.

Meanwhile, a downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.

Of course, MBIA and Ambac could still convince the rating agencies to maintain their triple-A’s, something that New York State insurance commissioner Eric Dinallo has been working on for the past month.

To read more about is time running out for bond insurer MBIA head on over to CNBC.