Citigroup, Merrill Hide Counterparties and Pain: Jonathan Weil
Commentary by Jonathan Weil
Jan. 23 (Bloomberg) -- Wall Street banks, confess thy counterparties.
The two biggest bond insurers, MBIA Insurance Corp. and Ambac Assurance Corp., are on the verge of losing their AAA credit ratings and, thus, their main lines of business. And, once again, some big banks may be setting up their investors for more nasty subprime surprises.
Citigroup Inc., which wrote down its subprime-mortgage holdings by $18.1 billion last quarter, might look like it did a kitchen-sink kind of cleanup. That is until you see the $10.5 billion of ``hedged exposures'' on Citigroup's Jan. 15 fourth- quarter financial release.
The exposures are collateralized debt obligations, or CDOs, tied to subprime mortgages, while the hedges are side contracts designed to protect Citigroup against losses. The problem for investors: Citigroup didn't disclose which companies are on the other side of those hedges, or how much the hedged CDOs have declined in value, or how much money each counterparty is guaranteeing.
Those are facts investors ought to know. On Jan. 18, Fitch Ratings downgraded New York-based Ambac two levels to AA. Moody's Investors Service and Standard & Poor's are reviewing Ambac's ratings for possible cuts. Moody's said it may reduce Armonk, New York-based MBIA's ratings, too.
So far, though, Citigroup is refusing to identify any of its counterparties. And, for the most part, so are just about all the other major banks.
More to Come
Citigroup booked $935 million in losses to reflect declines in the creditworthiness of its counterparties, primarily the bond insurers, also known as monoline insurers. During a Jan. 15 conference call, Citigroup's chief financial officer, Gary Crittenden, said ``we have approximately $3.8 billion of exposure to monoline insurers.'' If Ambac or MBIA is among them, Citigroup's credit losses are bound to rise. A Citigroup spokeswoman, Christina Pretto, declined to comment.
The same guessing game is playing out across the financial industry. Merrill Lynch & Co. and Canadian Imperial Bank of Commerce took $1.9 billion and $2.1 billion in writedowns, respectively, for hedged CDOs backed by ACA Financial Guaranty Corp. Neither bank confirmed that ACA was a counterparty until after the insurer was cut to CCC last month from A, although some analysts had figured it out sooner.
Merrill, which took $16.7 billion of writedowns last quarter, said it booked $679 million in credit losses on unnamed AAA-rated guarantors backing $13.2 billion of subprime-related CDOs. The value of those hedged CDOs had fallen $4.1 billion to $9.1 billion as of Dec. 28. A Merrill spokesman, Bill Halldin, declined to name the guarantors. However, Halldin said Ambac isn't one of them, a point he said can be deduced from Ambac's disclosures.
Unrecognized Losses
In a Jan. 21 prospectus, Toronto-based CIBC said five unnamed guarantors -- four rated AAA and one AA -- were backing $4.5 billion of its subprime-related CDOs. While the value of those hedged CDOs had fallen to $1.9 billion at Dec. 31, CIBC hadn't yet recognized any losses on them.
The four AAA guarantors' losses ranged from $1.5 billion to a mere $1 million. Meanwhile, the AA guarantor, which CIBC said was on the hook for $217 million in losses, appears to be Ambac; a footnote said Fitch had just downgraded it from AAA.
Given the bond insurers' credit problems, Canada's fifth- largest bank said ``it is increasingly likely'' it will boost ``the amounts of writedowns'' related to U.S. residential real estate.
A CIBC spokesman, Rob McLeod, said ``it is not our general practice to'' name counterparties.
Parlor Game
Guessing banks' counterparties might be a fun parlor game, if the stakes weren't so huge. The seven AAA-rated bond insurers guaranteed $2.4 trillion of debt, including $1.2 trillion of municipal debt and $100 billion of subprime-related CDOs. Of course, AAA ratings don't mean much anymore.
Just look at MBIA Insurance's parent, MBIA Inc. On Jan. 9, MBIA cut its dividend 62 percent and reported $4 billion of fourth-quarter losses related to mortgage securities.
New troubles surfaced last week at its AAA-rated Bermuda reinsurance affiliate, Channel Reinsurance Ltd. Two of Channel Re's investors, PartnerRe Ltd. and RenaissanceRe Holdings Ltd., said they likely will write off their investments in the company, taking a combined $200 million in losses.
MBIA, which owns 17 percent of Channel Re, is Channel Re's only customer. As of Sept. 30, MBIA had bought 54 percent of its reinsurance from Channel Re, covering about $42 billion of policies.
Owning Up
Somehow, MBIA has kept Channel Re off its balance sheet. However, if Channel Re collapsed, MBIA still would appear to be responsible for the policies it had ceded to the reinsurer.
Additionally, MBIA at Sept. 30 had about 6 percent of its reinsurance with Ambac, which just got downgraded by Fitch and yesterday reported a $3.3 billion fourth-quarter loss.
Then there's this tidbit: At Sept. 30, MBIA said it had a $37.7 billion investment portfolio, including $24.5 billion of holdings rated AAA. Yet $5.1 billion of those investments were rated AAA only because they were insured by MBIA. Without the AAA wrap, their value would have been lower. Who would have dreamed capital could be so circular?
An MBIA spokeswoman, Elizabeth James, declined to comment. MBIA is scheduled to report fourth-quarter results on Jan. 31.
While there surely is a reason the banks won't name their troubled CDOs' guarantors, I can't think of a good one. The nastiest surprises probably won't come from Citigroup, CIBC or Merrill, though. They'll come from companies that so far haven't disclosed any problems with their counterparties at all.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net |
