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Subject: Fwd: U.S. Credit Markets Collapsing!
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Subj: U.S. Credit Markets Collapsing!
http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1453
*U.S.
Credit Markets Collapsing!*
By Martin D. Weiss, Ph.D.
02-18-08
The U.S. credit markets, the giant growth engine that
powers the American
economy, are collapsing ... with few credit sectors
spared from damage, few
investors escaping losses, and little hope of
federal action that's quick or
strong enough to make a major
difference.
Here's what's happening ...
First and Foremost, the
Fall of The Nation's Three Largest Bond Insurers
Is
Accelerating
This is the Great Ratings Debacle I highlighted
last year.
And now, the critical watershed event that I said would
trigger the next phase --
the collapse of the bond insurers' triple-A
ratings -- is here in aces and spades.
Without the triple-A rating,
their whole reason to exist falls by the wayside:
They cannot enhance the
credit of bond issuers. They cannot do more business.
They may as
well close their doors and go home.
The facts:
* Financial
Guarantee Insurance Co. (F.G.I.C.), the nation's third largest, just
lost
its triple-A rating last week. Moody's literally gutted its rating by
a
full six notches in one fell swoop.
* At the same time, Moody's
warned that unless F.G.I.C. can raise the needed
capital, it's ready to cut
F.G.I.C.'s rating to a hair above junk.
* To underscore that it means
business, Moody's has already downgraded FGIC's
senior debt to junk,
threatening to drop it to deeper junk.
* Ambac's triple-A rating was
zapped by all three major rating agencies in late
January.
* Next,
M.B.I.A. is on the chopping block, slated to lose its triple-A
rating
within a matter of days.
All three of the largest bond
insurers are engulfed in the mess. And all three
are trapped between
two major business lines -- their traditional business of
insuring
municipal bonds against default, which is supposedly still stable ...
and
their newer business of insuring mortgage- and debt-backed securities,
which
is in total disarray.
Meanwhile, the nation's banks and other
big investors -- the last hope for bond
insurers -- have so far failed to
come forward with the needed capital.
So, in a surprise announcement on
Friday, New York Governor Eliot Spitzer
threatened to intervene with
massive, radical action. He said he would ...
* take over the two
bond insurers which are regulated by New York State --
M.B.I.A. and Ambac
...
* strip out all their supposedly good assets (insurance policies
covering
municipal securities) ...
* pack away those assets in newly
formed separate companies, and ...
* leave behind strictly the bad
assets (polices covering the disaster-plagued
mortgage and debt sectors).
The bankers were shocked and dismayed. Instead of being the
first to hear the
news as part of their intense, ongoing discussions with
New York State
regulators, they heard about it on C.N.B.C. And
instead of responding with fear
and remorse, their primary reaction is
anger and rebellion.
What's next? Follow along with me, and
you'll see that, like four different
pathways engulfed by the same forest
fire, all four likely scenarios lead to
essentially the same result:
Credit collapse.
Scenario A: Bank Rescue
Despite their
instincts not to get dragged into the morass, bankers, and other
investors
come through with 11th-hour capital infusions for the bond
insurers.
Consequences: The banks take a big step closer to
insolvency, creating an even
broader threat to the financial
system.
Reason: The true liabilities of the bond insurers are
incalculable. The
potential exposure to losses is virtually
unlimited. And before the bond
insurance crisis, the banks were
already buckling under their subprime mortgage
losses.
Scenario B:
No Rescues, No Takeovers
The banks stay out. But despite his
warnings, Spitzer fails to move forward
promptly to take over the bond
insurers.
Consequences: The current downward spiral of the bond
insurers continues
unabated. M.B.I.A., the last of the Big Three to
be downgraded, loses its
triple-A rating. F.G.I.C. is downgraded to
junk; Ambac, to near junk. The $2.6
trillion municipal bond market
virtually dies.
Reason: When the bond insurers are downgraded,
the hundreds of thousands of
municipal bonds they cover are automatically
downgraded -- a ratings collapse
that's so massive, it can shut off the
credit spigot to all city and state
governments, whether insured or
