Banks face ‘possible’ £5bn writedowns

Three of the world’s largest investment banks could potentially face
writedowns of up to $10bn (£5.1bn) after their bond insurers were downgraded by
Standard & Poors last week, reports
Financial Times

According to analysts Citigroup, Merrill Lynch and UBS have hedged their
collaterised debt obligations and mortgage backed securities of $6.3bn
(£3.23bn), $4.8bn (£2.46bn) and $3bn (£1.5bn) respectively with insurers Ambac
and MBIA.

Wall Street executives were surprised by S&P’s decision to downgrade
Ambac and MBIA from a trip A rating in February and March to a double A last
week with Moody’s expected to downgrade Ambac to double A and perhaps cut MBIA
to a single A shortly.

‘They and other credit rating agencies have been under pressure to anticipate
developments, rather than lag behind the curve, and this looks like an attempt
to do just that,’ said a Wall Street executive.

The prospects of further writedowns related to bond insurers, also known as
monolines, could deepen concerns over the financial health of US and European

Ambac and MBIA, which guarantee more than $1,000bn (£512bn) of bonds, raised
cash earlier this year to prop up their capital bases, damaged by exposure to
mortgage-backed bonds.

Although concerns have eased that bond insurer downgrades could damage the
entire financial system, there remains the potential for individual banks and
investors to suffer further pain from Ambac and MBIA’s problems.

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