Moody's has placed Ambac, which insures more than $556 billion in bonds, on review for a possible reduction in ratings, a move that could spark similar downgrades on billions of dollars of debt.
If Ambac loses its AAA rating, the ratings on the bonds it insures would also be lowered, forcing the owners of those bonds to mark down the value of their portfolios.
After increasing its predictions for losses on subprime mortgages, S&P said it is also examining all bond insurers. The new reviews are taking place just a month after Moody's and S&P affirmed ratings on Ambac and MBIA Inc., the two largest bond insurers. Both companies ended up slashing dividends and announcing plans to raise $1 billion each to strengthen capital and retain their top ranking.
The Moody's and S&P's statements indicate the bond insurers’ actions may not be enough, says Richard Larkin, a municipal bond analyst with JB Hanauer & Co.
Says Larkin, “No one knows when the end may be in sight, including the raters. The rating agencies have lost as much credibility as the bond insurers. Every time you turn around they're changing their minds about what's going to happen in the subprime mortgage market.”
The bond insurers found themselves under review after expanding outside their traditional municipal-bond businesses into guaranteeing securities linked to subprime mortgages that began a steep drop in value. Until last year, Ambac and MBIA had recorded profit increases each year for the past decade.