Ratings Collapse Discussed in the Latest Money and Markets

Jupiter, FL (PRWEB) December 28, 2007 -- Martin D. Weiss, Ph. D. takes a closer look at the recent ratings collapse and advises on the possible outcomes this drop could create. Dr. Weiss examines risky investments along with Wall Street ratings.

MBIA, the world's largest bond insurer, is on the verge of losing its triple-A rating. That single event could trigger a veritable ratings collapse, downgrades on the one hundred and seventy-three thousand municipal bonds, mortgage-backed securities and other collaterized debt obligations (CDOs) that MBIA guarantees.

Then the three other large bond insurers: Ambac, FGIC, and CIFG, could also lose their triple-A ratings, spreading the crisis to nearly all of the nation's $2.3 trillion of insured securities.

Since lower-rated bonds are invariably lower-valued bonds, when they're downgraded there will be an across-the-board downward adjustment in bond prices, a bond market crash. Investors may also begin to question Wall Street's entire system for rating the nation's $2.6 trillion in municipal bonds, $10.6 trillion in corporate bonds and $1.9 trillion of commercial paper and other money market instruments.

In short, this crisis could raise doubts about the true value of all non-Treasury securities whether insured or uninsured, long-term or short-term, at risk or not at risk.

Needless to say, the Fed will respond with massive money pumping. And if MBIA can receive a massive capital infusion, a bond market panic may be avoided for now. But any capital infusion is unlikely to be more than a temporary band-aid. No matter how the crisis is ultimately resolved, the U.S. is bound to see a substantial flight to safety.

Consider the facts revealed last week:

MBIA has guaranteed $8.1 billion in securities that are among the most dangerous in the world, an especially risky variety of CDOs which themselves are made up of CDOs (called "CDOs squared"). In other words, MBIA doubled up its risk on an already-risky investment; and it did so in huge amounts.

On September 30, 2007, more than two months before the latest revelations, MBIA's stockholders' equity was only $6.5 billion. That means the $8.1 billion in these double-risk CDOs alone represent 125% of MBIA's total capital. In total, MBIA has guaranteed $30.6 billion in mortgage-backed securities and CDOs and these are now plunging in value due to rapidly spreading mortgage defaults and widespread investor flight.

This broader category of risky investments represents 470% or nearly five times MBIA's capital. The company has not provided estimates of how much money it could ultimately lose. But based on the latest price of MBIA's shares, the market is estimating that its losses are more than $7.5 billion.

Reason: As of the close on December 21, MBIA's share price was off 73% this year alone. The entire rationale of bond insurer ratings is now out the window. When bond default insurance was first introduced years ago, the methodology used to evaluate the risk on something that never existed before was questioned.

But the bond insurers hauled out an obscure, never-published Ph.D. dissertation about municipal bond failures in the Great Depression. Their rationale: "All we need is enough capital to cover the worst-case depression scenario. Then, as long as actual default rates stay below those levels, we'll be in good shape."

The Wall Street rating agencies bought this argument hook, line and sinker. And the bond insurers have received triple A ratings ever since. But in recent years, in tandem with the housing bubble, the bond insurers have also insured massive amounts of mortgage-backed securities and other CDOs, for which there was no historical precedent whatsoever, not even an obscure thesis.

"In other words, they abandoned the original basis for bond insurance and marched off into completely unchartered territory. Now, a large percentage of these new investments are in default or soon will be. And now, the entire rationale underlying bond insurance is out the window," Dr. Weiss states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?NewsletterEntryId=1301

About MARTIN D. WEISS & MONEY AND MARKETS     

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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