Source:
FortuneNEW YORK (Fortune) -- Wall Street banks may inject cash into ACA Financial Guaranty Corporation, which was dramatically downgraded to junk while nearly the entire bond insurance industry was put on negative credit watch by S&P yesterday.
But don't believe for a second that the bailout team of CIBC, Merrill Lynch, and Bear Stearns believe in the company or its business model. They're just trying to avoid another round of extremely damaging write downs on top of the $76 billion in losses that securities firms and banks have posted this year. "The reality, which is clear to Wall Street though obviously not to Washington, is that any such infusion would be a clear attempt to avoid having to recognize losses tied to monoline counterparty exposures," Josh Rosner, managing director at the research firm Graham Fisher, said in a research report issued today.
He adds that the move is the latest in a growing list of strategies banks have used avoid growing economic losses throughout the current economic crisis. The possible ACA bailout is a perfect example of this hypothesis. When ACA's debt went from A to CCC, the move also hit Canadian bank CIBC (which Fortune predicted in November). CIBC said it may immediately write down $1.7 billion of the $3.5 billion in mortgage holdings guaranteed by ACA, which were part of CIBC's roughly $10 billion in hedged collateralized debt obligations.
These CDOs were not included in previous write downs because, though sullied by bad mortgage debt, they were supposedly insured or hedged by entities like ACA. Now that ACA can't backstop the losses, the credit ratings on those bonds will fall, and result in losses.
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http://money.cnn.com/2007/12/20/news/companies/benner_ACA.fortune/index.htm?postversion=2007122011
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