“This Is Going to Be Worse Than Anybody Thinks”
January 21st, 2008I guess that analyst hasn’t been reading Cryptogon.
Via: The Street:
Recession is no longer the taboo word on Wall Street. It’s being tossed around like confetti.
The new phrase that can’t be uttered is “systemic risk,” and with bond insurer Ambac losing its triple-A credit rating from Fitch Ratings on Friday, the real risk of a financial disaster will be widely whispered into the next week amid the possibility of more downgrades for the industry.
T.J. Marta, fixed income strategist with RBC Capital Markets, estimates that roughly $2.5 trillion in outstanding debt is backed by bond insurers like Ambac and MBIA (MBI – Cramer’s Take – Stockpickr – Rating), and credit downgrades are a mortal threat to their business models.
If the bond insurers fail, that raises the specter of a massive wave of wealth destruction in a global financial system that is flooded with illiquid and opaque derivative securities of which there is little understanding, except that their value is connected to credit ratings on structured finance securities.
“This is going to be worse than anybody thinks,” says Marta. “What I heard from Ambac [on Friday] is that they’re throwing back the lifeline and saying, ‘We’re not going to make it.’ On a fixed income trading floor, that means the world truly is upside down.”
On Friday, Ambac said it was abandoning its plans to raise $1 billion, a day after Moody’s Investor’s Service threatened a credit downgrade. Fitch responded by cutting the premium triple-A rating to double-A for Ambac Assurance Corp., Ambac Assurance UK Ltd. and Connie Lee Insurance Co. and slashing holding company Ambac Financial Group from double-A to single-A. Fitch also warned that more downgrades could be in store.
