Now the whole house of cards built from Credit Default Swaps (CDS) is starting to come down. Yesterday the credit insurer ACA had its credit rating by Standard & Poor's cut all the way from "A" to "CCC". As I said last Friday the New York Stock Exchange announced they would delist them, so today's news was rather expected. A credit rating of "CCC" essentially means "bankrupt". This means that all the bonds they insured get their credit ratings lowered, and there will be big writedowns and maybe forced sales. Now we'll get to know who's been doing business with ACA. Canadian bank CIBC came out straight away and said that they have "insured" $3.5 billion of subprime loans with ACA. I suspect Merrill Lynch and Bear Stearns are feeling the heat too, because they have discussed "bailing out" ACA (to save themselves, I suppose). Even if this is possible, which I doubt, it would probably cost them billions. Then what happens when they have to bail out the next credit insurer that goes bust. FGIC, MBIA and Ambac are good candidates for this.
I started writing this post yesterday - and sure enough here we go today (the day after their AAA rating was affirmed by S&P) MBIA comes out and says that they "insured $8.1 billion of so-called CDOs-squared, which repackage other CDOs and securities linked to subprime mortgages". For those who don't know, CDO-squareds are considered very risky.
Things seem to be happening very quickly right now. What next? Will things quieten down over Christmas, or will we see more problems building up every day?
Potential problems in the CDS markets is something I mentioned already in my first post in August. Now it's starting to get serious.
The moral of the story is:
No insurance is safer than the insurance company itself!