How bad is the current wave of downgrades compared with the past? Literally, unprecedented.
Considering that, according to Financial News Online, nearly 20,000 downgrades have been announced this year. That compares with 2,539 for all of 2006. That’s stunning. Even more troubling: the number of highly rated securities that have been downgraded. AAA downgrades are hitting us right and left, almost no big deal. But before 1999, there had never been a downgrade of such a security.
The best short analysis I’ve read on the topic is here:
Something is wrong when an entire industry teeters on the brink of destruction because of – what? – a change in credit rating.
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The very premise of monoline insurers like MBIA and AMBAC has been in question for more than a decade. Minimal capital, massive theoretical exposure, little data on historical losses. It is the classic business of selling out-of-the-money put options, collecting premium, showing great ROE and margins until, POW! You’re dead.
Posted: December 11th, 2007 under Americas, Fixed Income, General.
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