Bond Insurers Facing Another Round Of Credit Downgrades
With the financial system crumbling, it seems as if ratings agencies can’t cut credit ratings fast enough. Facing intense scrutiny from regulators because of their part in the build up and subsequent collapse of the subprime market, ratings agencies aren’t holding back when it comes to ratings downgrades.
It’s actually a little bit amusing that in some circles they are actually receiving some criticism for being a little to quick on the draw. Standard & Poors and Moody’s Investor Services have their sights squarely on the bond insurance industry which will likely face another round of downgrades as they continue to face losses from insuring toxic Collateralized Debt Obligations.
Fitch Ratings Services would also probably be considering another round of downgrades if not for the fact that many companies in the industry have asked them to cease rating their companies. You could say they lost some clients for being the first ratings agency to point out the considerable difficulties that the industry faces today.
A major problem of the financial system has been the conflict of interest between rating agencies and the companies that hire them. Give a bad rating and the company being downgraded is likely to cut ties with them if one of the other agencies is willing to give a higher rating.
Credit ratings are the bread and butter of financial institutions. It determines how their interest rates will be in order for them to raise capital in the bond markets as well as having a significant impact on their stock prices.
Capital reserves can quickly dry up in this type of economic climate and firms with low ratings will find liquidity practically nonexistent. One need only look at the example of AIG to see this how quickly an industry giant can be brought to it’s knees.
It’s becoming an endless cycle downwards, as bond insurers get downgraded, it has a significant impact on the financial system as all the bonds they insure get downgraded as well. The financial institutions that hold these bonds will have to writedown these losses due to the market devaluations to their portfolios.
This then leads to their ratings downgrades as well as the impact of the devalued bonds slowly makes it’s way through the financial system. Unfortunately the problems facing the bond insurers are far from over as their fate and the rest of the financial system as well will likely be tied to the fate of the housing market.
