Investors Losing Confidence in Bond Insurers
An article published by the Wall Street Journal takes a look at the shaky state of bond insurers as the credit climate worsens. According to the article:
The immediate concern is that insurers will need to raise more capital to maintain their triple-A credit ratings. If a bond insurer’s rating slips, it could trigger a domino effect of bond-rating downgrades.
While the likelihood of insurers’ ratings being cut appears remote, “if their credit ratings were downgraded, then the whole industry would go away,” said Ann Rutledge.
Such a collapse would hurt investors ranging from retirees to banks to hedge funds — anyone owning debt insured by these financial guarantors. A bond becomes more risky to hold if its insurer is perceived to be weaker.
Now, with record volumes of subprime mortgages going bad and thousands of mortgage bonds and CDOs, including some triple-A-rated securities, being downgraded, some insurers are in a precarious position.
Investors are worried insurers will need to increase their capital levels to support their guarantees on bonds that grow riskier, as required, and to maintain their own high credit ratings.
It’s hard to have confidence in a declining market, especially one as big and important as the credit market. This lack of confidence will only weaken the already troubled market. Unless bond insurers can convince investors to act as if there were no credit crisis, the future of lenders isn’t looking too bright. Most lenders are terrified of further losses resulting from enlightened consumers as they opt towards making bi weekly mortgage payments.
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