Bond Downgrades May Soar – “We Have Yet to Scratch The Surface”

Posted on June 23rd, 2008 in Daily Mortgage/Housing News - The Real Story

What a mess. Weren’t these all the same companies that in March and April were talking about “lights at the end of the tunnel,” “credit spreads coming in” and “eighth innings?” The monolines insure some $1.28 Trillion in debt.

  • CreditSights says“the downgrades that we have seen so far, numerous though they have been, have yet to scratch the surface of the potential downgrades that will ultimately be required.”
  • Altynay Davletova, an analyst at Merrill Lynch in London, wrote in a report today,“While we believe that many investors have been preparing for such events, we still fear that there are some investors who need to take action,”
  • Lehman Brothers Holdings Inc. analysts led by Ashish Shah in New York said in a report today that “the downgrades are likely to put `further stress’ on the structured credit market”.
  • “This form of systemic risk from monoline downgrades represents another negative development for credit markets,” Bank of America analysts wrote.

Just yesterday, I put out a post on how bond insurers are asking for banks to commune $125 BILLION in Credit Default Swaps. The bond insurer story is the canary in the coal mine for the credit market story and in my opinion, has always been. – Best, Mr Mortgage

Bond Downgrades May Soar After MBIA, Ambac Are Cut (Update2)
By John Glover

June 23 (Bloomberg) — Downgrades on securities guaranteed by MBIA Inc. and Ambac Financial Corp.may only “scratch the surface” of rating cuts after the bond insurers lost their top grades, CreditSights analysts said.

As much as $1.28 trillion of debt is covered by the so- called monolines, CreditSights said, citing data compiled by International Swaps and Derivatives Association. Standard & Poor’s cut the ratings of 0.42 percent of securities included in Merrill Lynch & Co. indexes of asset-backed debt, the analysts said.

“The downgrades that we have seen so far, numerous though they have been, have yet to scratch the surface of the potential downgrades that will ultimately be required,” New York-based analysts Brian Yelvington and Rob Haineswrote in a report today. “Downgrades of the monolines themselves result in ipso facto downgrades for the paper they have insured.”

MBIA and Ambac were stripped of their top grades by Moody’s Investors Service last week, following downgrades by Fitch Ratings and S&P. Armonk, New York-based MBIA said it will probably be required to make $7.4 billion of payments and collateral postings after being downgraded five levels.

`Roller-Coaster Ride’

Investors should brace for a “roller-coaster ride” caused by an “avalanche” of rating cuts that may force some investors to sell holdings, according to analysts at Merrill Lynch.

“While we believe that many investors have been preparing for such events, we still fear that there are some investors who need to take action,” Altynay Davletova, an analyst at Merrill Lynch in London, wrote in a report today.

The downgrades are likely to put “further stress” on the structured credit market, Lehman Brothers Holdings Inc. analysts led by Ashish Shah in New York said in a report today. Many of the world’s largest banks may be forced to write down the value of their positions following the downgrades, the report said.

Banks may also have to bring some municipal securities on to their books because some of the money market funds that buy them aren’t able to hold lower-rated notes, Bank of America Corp. analysts said in a report.

“This form of systemic risk from monoline downgrades represents another negative development for credit markets,” the analysts wrote.

To contact the reporter on this story: John Glover in London at


24 Responses to “Bond Downgrades May Soar – “We Have Yet to Scratch The Surface””

  1. I would say the tip of the Iceberg.

  2. Price of Australia iron material exported to China was doubled!!! Everything will be expensive.

    Peter Schiff was so stupid on Emerging market.

    No country will not suffer during this global recession.

    Beside, I need to LOL on his Singapore Investment strategy… That is the biggest joke…. How can a country smaller than San Jose escape the global crisis???

  3. I really want to see how Peter Schiff’s customers gonna kick his behind after so many mistakes he had made this year: GDX, GLD, Hongkong Stocks, Canadian stocks, Singapore fund, Newzealand Dollars…

    Although he could be all right in the end…

    Timing is worse than Jim Rogers, almost as same as David Tice.

  4. The reason why I say Peter Schiff was wrong is because he misunderstood the globalization world, and did not realize that a lot of US debt is actually put on other citizens shoulders.

    So, basically, if you have cash, it is not very urgent for you to have precise metal or foreign stocks for the long run, because US dollar will not alway keep depreation. Besides, when the rate increases eventually, your dollar will be more safer and stronger and earn big interest better than dividends.

    This is amazing, although broke, US can still handle the world in an ugly way.

  5. Feng you absolutely right. The morons holding the bag are foreign investors. They are stuck big time. And this is a real good thing too. If it can ruin a good part of Japan, Russia, Africa, South America, India, China, Canada, Saudi Arabia, Europe, this will be excellent ! Why ? It’s damn good 101 economic education. Stupid foreingners. These people desserve to get a good kick in the ass. Nothing better than losin money invested in a stupid way outside of their country. Excellent lesson!

  6. Not just bond downgrades. I think that that paper in general will downgraded in this cycle. This is NOT an ordinary recessionnary downgrade. This looks more and more like a full blown depression induced by a classical credit crisis. Rotten paper everywhere.

  7. Marc, you are absolutely right about the rotten paper everywhere. This is a classical credit crisis on steroids that has been exposed to massive quantities of radioactive waste.

    I wouldn’t be so harsh on foreign investors. They were sold derivatives on the basis they were safe because of the AAA ratings. Those derivatives, and the ratings given them, all seem now to be a scam organized and perpetrated by the biggest Wall Street firms. To the foreigners, all that will matter is they are all from the US, and sold to them by American firms.

    I am not suggesting the economies of the world are actually able, at this point, to be decoupled from the US economy. But I do know this, in order to prevent losses like this from re-ocurring, they will work very hard over the next generation to decouple from America.

    In the near term, foreigners will be increasingly reluctant to buy any of our debt, including treasuries, when they need that money to help their own economies. This point alone is very problematic for the US.

    You must understand, China has been barely breaking even with its trade with the US for more than a year. Because of the Olympics, there are many actions the Chinese have held back on, so they can project a happy face to the world. Wait until after the Olympics. It is very likely everything with a ‘Made in China’ label will be 20% -30% higher by Christmas.

    Oh, and you talk about the foreigners who bought that ‘rotten’ paper. The Chinese bought $1 Trillion of MBS and CDO’s, CLO’s etc, all based in 2005 and 2006 originations. What do you think they are worth now? I can tell you it is less than half of what they paid. And as property values decline here, it loses more value.

    How upset might they be about this? I know they can’t be happy. The Chinese also know there are emerging markets they can have a little more control over.

    The biggest mistake anyone can make is applying American values to the Chinese. Ain’t never gonna happen. They view the world in a much different way than the US.

    Schiff, in the end, may be closer to right than many think.

  8. That’s what happens when you put incompetent morons and gangsters at key government positions such as the Presidency, Congress and the Treasury who in turn let other con-artists such as the FED run the show.

  9. The news on housing and financials in general is just horrific today–and the market is CLEARLY being manipulated!!

    PPT in full effect!! I would NEVER put my money in the stock market now, you would seriously face better odds in Vegas

  10. Financials were weak early (as one would expect).. but have turned around big time.. HUH?

    This is very weird.

  11. Yes it is soo funny. It’s like in the film “Wag the dog.”
    Then suddenly quite a rallye.”It’s because they are technically oversold.”(Stupid moron journalist from Bloomberg) We know the pattern always applied by these psychopaths. At least at Las Vegas you can calculate your probalities. Rrecord consumer pain. Record decrease in home prices. Record pessimistic outlook. The PPT should be have been great in Nazi Germany;Paper Propaganda Team.
    and Plunge Protection Team. Both names would be fine.

  12. What’s the next step ? The death penalty for anyone shorting banks and financial institutions or buyin oil ?

    This news is troubling. Last week it was the fault of the “bad speuculators” buying commodities. And now this. I think slowly but surely the USA and Great-Britain are transforming themselves in facsist states. Their stupid measures to kill the market will not work.

  13. regulation is a double edged sword – we need SOME regulation to protect against corporate abuses and less in other areas.. to protect trade strategies.

    How about we start with something small.. like making it illegal to lie about what’s going on with your company’s financial statements ;p

  14. Are you sreious Micahael ? 🙂 The whole system would crumble in 24 hrs, if you really forced these bankers to come out with the truth in 2008. The reality is that we live in a system continually based on half truths. And when the truth is to painful, well, you change the rules and you assasinate it. The best regulation of the 10,000 years is called the marketplace, not the SEC, or the stinking Congress and damn crooked politicians. Bankers believe in markets only when it serves their interests.

  15. Marc, Well said.

  16. Fen and Marc Peter Schiff owns you 2. I’m sure that you guys make more money than he does right? Is China in a recession? Is Japan in a recession? This isn’t a global credit crisis. This is America’s credit crisis. We are ground zero for this. It’s not going to be as bad anywhere else. There are a few banks here and there that are going to go under. No whole nations are going to be taken out though like the good ‘ol USA will be.

  17. Ah Ben. It’s much more complicated than that. You should ask that to the average spaniard or russian. It’s because you do not know what is going on in Western Europe. Not a pretty picture at all. This isn’t a global credit crisis. Scuzzi ? Pardon ? You should ask that to Alistar Darling Britain’s central banker or Jean-Claude Trichet of the ECB.

    I read last week that European banks URGENTLY need to tap 400 billion Euros from the market. Not global you say ? Here in Canada, three months ago, the whole banking system almost imploded because of commercial paper assets filled with what else, CDO’s from the US real bubble.

    China is not in recession true, but inflation is eating them alive and the stock market has imploded. As for Japan, the place is not in recession, it’s in depression. What can I say about a country with zero % interest rates for 10 years ? This is not my definition of a country just doing fine.

  18. OK. Here is it BEN. It’s about wonderful Asia.

    You apparently don’t remember the mass protest et and riots in Asia last month. “Bleak Time” ain’t my definition of good times.

    Asia on the surface, looks fantastic, but the place is full of pitfalls and has real potential for generalized strife and crisis. You have to go beyond the propaganda and the current bull. A lot of these countries are also in a type of hyper speculative bubble. “Don’t believe the hype.” 🙂

    Asian Economies Facing `Bleak Time,’ Aberdeen Says (Update1)

    By Hanny Wan

    June 24 (Bloomberg) — Asian economies are in store for a “bleak time” in the next 18 months as surging inflation erodes corporate earnings, Aberdeen Asset Management Asia Ltd. said.

    “The majority of companies are facing rising costs: rising property costs, rising wage costs, rising raw material or energy costs,” said Aberdeen’s Hugh Young, who helps manage $47.8 billion in Asia from Singapore. “So margins are facing quite a squeeze this year.”

    Economies across the region are under threat as spiraling food and energy bills sap household and business budgets, and stoke inflation. China last week joined India, Malaysia, Indonesia and Pakistan in increasing fuel prices and reducing subsidies, touching $139.89 a barrel on June 16.

    “Our fear is this year you’ll be seeing more and more of the term that we started to use at the beginning of the year, which is `stagflation,”’ Young told reporters in Hong Kong. “We’re going to go through a period of far slower growth in Asia with a combination of far higher inflation.”

  19. Combine credit risk with exploding inflatio, it’s the ultimate kiss of death for bonds. Don’t buy bonds. But it gets worse. Companies are having problems passing the costs too. Can’t buy the stock market and can’t buy bonds. Buy oil, gold, silver, food and wait.

    “Inflation is here big-time,” Mr Holliday told the Financial Times, adding that companies such as DuPont faced “tremendous cost pressures” and had the “obligation” to raise their prices to offset higher costs.

  20. Now imagine for one second what happens to General Motors, Ford or Chyrler bonds with the price of steel doubling overnight. What about United Ailines bonds ? It’s evident. The graveyard will be filled with busted bonds. It’s not just the banking system and the real estate sector that is in trouble, it’s the whole economy.

  21. Operation pump and dump in process this week. Putting a nice picture on the market to boost that moron Bernanké. Inflation is contained and bonds are a real bargain, especially the TIPS bonds. Just kidding.

  22. 3 major downgrades; GM, Ford and Chrysler. The reeper is coming.

  23. […] Bond Downgrades May Soar – “We Have Yet to Scratch The Surface” […]

  24. Merrill Lynch july 2nd 2008:”Possible GM bankruptcy”

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