Confidence Game - Christine Richard [147]
The next day, Dinallo told Bloomberg Television News, “We thought we had an understanding that the money would be used for the rating and the solvency.”
On May 12, MBIA said it would contribute the money to its insurer in 10 to 30 days “after consultation with the New York state insurance department.”
“We are pleased that these funds will go to benefit policyholders,” Michael Moriarty, deputy superintendent for property and capital markets at the New York State Insurance Department, said in an e-mailed statement. “As MBIA was aware throughout our discussions, the Insurance Department expected this capital to be used to support the insurance entities and we are gratified that MBIA has taken the necessary steps to implement this.”
It seemed increasingly likely that MBIA’s insurance unit was going to need that money.
Problems in the credit markets, and for bond insurers, were moving beyond CDOs to securities backed by home-equity loans. During the housing boom, these loans allowed Americans to turn their homes into virtual ATM machines, extracting cash for everything from vacations to college educations and remodeling projects. When home prices stopped rising, these boom-time loans quickly soured. On May 1, Standard & Poor’s made the ominous announcement that it would no longer rate bonds backed by U.S. second mortgages, calling the deterioration of those loans “unprecedented.”
Moody’s also was taking a gloomier view. It increased its projections for losses on home-equity loans to borrowers with low credit scores and said that the bond insurers’ ratings could be affected by the forecast. Moody’s now forecast losses of 45 percent on pools of these loans originated in 2007.
Rob Haines at CreditSights warned that both MBIA, which had backed nearly $19 billion of these securities, and Ambac, which insured $16 billion, would need to raise more capital to keep their triple-A ratings. Ambac responded with a 23-page slide presentation on its Web site disputing Haines’s report.
IN EARLY JUNE, Ackman got a call from Andy Kimball, Moody’s new chief credit officer. It was the first time in the three years he’d been making trips to Moody’s downtown offices that someone from Moody’s initiated a meeting. During the meeting, Ackman told the analysts that Moody’s was violating its own principles by not flagging the fact that MBIA was under formal review.
A formal review would alert all investors that MBIA-insured bonds faced the real possibility of a downgrade. The retirees who held MBIA-insured municipal bonds were entitled to know that the ratings on their investments might fall, Ackman said. Any other company receiving this much scrutiny would have been put under formal review long ago.
“Well, you know it’s being reviewed,” said Andy Kimball, Moody’s chief credit officer.
“I know it is,” Ackman replied, “but I’ve done more work on this company than anyone in America.”
ON JUNE 4, 2008, ACKMAN was on his way out the door when news crossed the wire that Moody’s was reviewing MBIA’s and Ambac’s triple-A ratings for a possible downgrade. He was already running late for an important lunch at the Plaza Hotel—and for this one, he needed to be on time.
Ackman ran back to his office, printed the Moody’s press release, and skimmed through it on the way down in the elevator. “Today’s rating action reflects Moody’s growing concern that MBIA’s credit profile may no longer be consistent with current ratings given the company’s diminished new business prospects and financial flexibility, coupled with the potential for higher expected losses and stress case losses within the insurance portfolio,” the release said. Ambac’s rating would likely be cut to double-A, while MBIA’s might go as low as single-A, Moody’s warned.
Single-A! A downgrade that deep would trigger huge problems