Wednesday, December 05, 2007

Capital Shortfall

Yesterday I suggested that Shitpile was unfolding like a game of Jenga, with a piece being pulled out every day as everyone holds their breath hoping it isn't the piece that causes the whole pile to come down. The interlocking financial system has a lot of discrete triggers, which makes it difficult for things to unwind gently. There are too many potential "nuclear events," where, for example, the downgrading of the ratings of a bond insurer causes a downgrade of everything they insure, which in turn mandates sales by funds which can only carry "high quality" assets, which erodes the price of those assets, etc... etc...

Dec. 5 (Bloomberg) -- MBIA Inc. is ``somewhat likely'' to face a capital shortfall, throwing its AAA credit rating in jeopardy and putting at risk the rankings of the state, municipal and corporate debt it guarantees, Moody's Investors Service said. The shares tumbled as much as 16 percent.

A review of MBIA, the largest bond insurer, will be completed within two weeks, Moody's said in a statement today. Moody's said additional scrutiny of the Armonk, New York-based bond insurer's mortgage-backed securities portfolio caused it to revise its assessment.

``The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,'' Moody's said. ``We now consider this somewhat likely.''