Bond Bust in the U.S.

April 28, 2008 - PRLog -- Martin D. Weiss, Ph. D.  takes a closer look at the collapsing bond market and how Wall Street is trying to keep the news quiet. Dr. Weiss examines how insurers are at losses.

The largest bond insurers in the U.S. are collapsing, but Wall Street's leading rating agencies are hiding it while regulators overlook the situation.  Just recently, Ambac Financial Group shocked analysts with first-quarter losses of $1.66 billion on top of $3.64 billion in the previous six months. And the underlying facts denote a company in a downward spiral:

•   Even excluding non-recurring items, Ambac's losses were $6.93 per share.
•   Ambac's write-downs of bad collaterized debt obligations (CDOs) and mortgage-backed securities was $5.2 billion.
•   Revenues from its credit insurance plummeted by 87%.
•   And its new policy business plunged to virtually zero.

Also, the costs of credit swaps on the company have greatly increased. Just to insure investors for $10 million for five years, it would now cost $1.1 million in upfront premiums plus an additional $500,000 per year. Total cost would be $3.6 million. And with devastating losses and its entire business model collapsing, it’d be expected that Wall Street's rating agencies would immediately announce deep downgrades. But Wall Street did the opposite, Standard & Poor's recently announced that Ambac's triple-A is solid and Moody's also reaffirmed its AAA rating of the company. Meanwhile, New York insurance commissioners have been endorsing the inflated ratings and actively pleading with the rating agencies not to issue potentially fatal downgrades.

The rating agencies seem to attribute great importance to their commentary and conditional statements surrounding their triple-A ratings. But they're apparently not important enough to include with bond offerings to investors, who typically see the S&P's AAA or Moody's AAA.  And the CEOs of the rating agencies rationalize their deceit as a public service in disguise. They know that the entire business model of bond insurers like Ambac is predicated on their triple-A ratings and that if they take away the triple-As from the bond insurers, they could destroy their business and even possibly doom them to failure. They know that the bond insurers cover hundreds of thousands of municipal and state governments, so if the bond insurers went under, the entire market for municipal bonds would collapse, threatening the finances of hundreds of thousands of local and state governments. They also know that their own firms derive a large part of their revenues by rating those same local governments. If they downgrade the bond insurers, they threaten the future of their own business.  And while their own ratings analysts await immediate downgrades, the CEOs manipulate the process, override the analysts' conclusions and force-feed the triple-A. Calling this a public service is a futile rationalization. The truth will come and it’s only a matter of time before the rating agencies must downgrade the bond insurers and finally face the day of reckoning they've tried so hard to postpone.

“The only lasting consequence of the rating agencies' delay tactics is to allow time for more people to get trapped in bad investments and more local governments to borrow money they can't repay. End result: Bigger shock waves on Wall Street and more damage to our economy than it would have suffered otherwise,” Dr. Weiss states.