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Credit Downgrades, More Write-Downs And The ARS Market

Credit downgrades last week to MBIA and AMBAC Financial Group, the world’s largest bond insurers, will lead to more write-downs at Citigroup, Merrill Lynch and UBS, according to a research report from Oppenheimer analyst, Meredith Whitney.

Credit downgrades last week to MBIA and AMBAC Financial Group, the world’s largest bond insurers, will lead to more write-downs at Citigroup, Merrill Lynch and UBS, according to a research report from Oppenheimer analyst, Meredith Whitney.

The two monoline insurers had their AAA credit ratings cut last Thursday by Standard & Poors to AA, which could limit their ability to write insurance.

“The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the sub-prime-related securities provided to the banks and brokers,” Whitney writes in her report. “The collateral damage could be in excess of an additional $10 billion.”

Meanwhile, in other news, the auction-rate securities market is still in flux. Registered Rep. wrote about the failures in the market in its May cover story. Cited in that story is a 2006 speech by Martha Haines, the SEC’s municipal securities chief, in which she calls out the ARS market for its flimsy structure and lack of transparency. She said it again last week in a speech at SIFMA’s legal and compliance conference in New York, according to this report . In short, she said that the whole mess probably could have been prevented if investors could have seen how involved the broker/dealers were in the market.

One of those broker/dealers was UBS, which is now on the hot seat regarding its own sale of ARS to clients, according to this story in the Boston Globe. Regulators want to know how much the firm knew about the trouble in the ARS market, when it knew it and if it warned some of its institutional clients early on while continuing to sell the securities to retail customers.

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