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CIFG Asks Fitch To Cease Rating Its Financial Guarantors; Ambac Presentation

CIFG is the latest party to ask Fitch to end the rating of its insurance subsidiaries.

CIFG Holding Ltd said on Monday it asked Fitch Ratings to withdraw ratings for its CIFG Guaranty bond insurance unit and two affiliates, citing a lack of confidence in the credit agency's approach.

The request to withdraw insurer financial strength ratings for CIFG Guaranty, CIFG Assurance North America Inc and CIFG Europe was disclosed hours after Fitch cut CIFG's ratings for a second time this month, amid worries about its capital position and exposure to U.S. subprime mortgage debt.

CIFG said it believed Fitch "is not in a good position to accurately determine the appropriate capital requirements for CIFG's insured portfolio"...

The other major credit rating agencies, Standard & Poor's and Moody's Investors Service, have also taken away CIFG's "triple-A" credit ratings.

MBIA asked Fitch to stop rating it about a month ago so the problems faced by Fitch isn't surprising. I don't think any of these moves by CIFG or MBIA help the bond insurance industry but it probably doesn't hurt it either. Fitch's models have been the weakest of the big three rating agencies (the others being S&P and Moody's). I think a lot of people, including me, lost credibility in Fitch when they almost implied that 'no amount of capital is enough to maintain a AAA financial strength rating.'

As with MBIA, without confidential information from CIFG, it would be difficult to provide an accurate rating in the future. Fitch will try to keep rating the financial guarantors but will have little advantage over other rating agencies that rely on public information alone. They likely won't be able to compete against Egan-Jones and other smaller rating agencies who likely will charge a lot less. This is pretty much the beginning of the end of Fitch's rating of bond insurers.

The unfortunate thing for the bond insurers--and you would know it if you were a shareholder :(--is that there is nothing worse than raising capital at exorbitant cost only to see ratings cut:

Last year, CIFG received a $1.5 billion infusion as part of an agreement to be acquired by Banque Populaire and Caisse d'Epargne, which together controlled CIFG's owner, the French bank Natixis SA. That injection was intended to help CIFG preserve the "triple-A" ratings it had at the time.

Management of many of the bond insurers are rolling the dice right now by diluting their shareholders heavily in order to maintain high financial strength ratings. If ratings are ever cut, as has been the case with CIFG, it would have been a disastrous strategy.

Note on Ambac

On a different note, Ambac is presenting in a couple of conferences and you can find their presentation here. It summarizes the present situation (basically a lot of storm clouds) but I didn't find anything deeply insightful. As I have suggested before, it is crucial for Ambac to avoid eliminating its structured finance side. Not only does it present the best growth opportunity in the future, it is also the backup in case Ambac loses its AAA rating. Practically no one has the expertise to underwrite structured products other than the monolines. Admittedly, the monolines compete against hedge funds, investment banks, etc that write CDS. But my expectation is for those parties to face even bigger problems than the monolines in the not-too-distant future. All it takes is a few big blow-ups for the market to start considering counterparty risk, which will provide an advantage to the mononlines (monolines also have counterparty risk but my guess is that it is much lower than the fly-by-the-night hedge funds or heavily leverage investment banks).

In addition to all that, there is a reluctance by some government entities in using bond insurance. For example, the State of California has asked some pension funds in its state, as well as the Federal government, to provide insurance. I am not sure if any formal offer has been made but so far no one is stepping up to the plate (I suspect a lot of entities have their own looming problems and can't waste money backing some municipality or quasi-government entity). Although I don't think anything will happen any time soon, the possibility of government insurance does exist. For instance, if I'm not mistaken, Florida provides catastrophe insurance. I'm not sure about the details or the extent of the coverage, but that has curbed private insurance (incidentally this is also what causes people to overbuild in risky areas because the government bails them out.) If government encroaches into municipal bond insurance, the monolines' best hope is structured products.

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