The Drumbeat of Ominous News Continues As MBIA, Ambac Downgraded

In a widely anticipated event, Moody's finally succumbed to mounting criticism from everyone in the investment community and downgraded MBIA and ABK.  MBIA's rating was cut five notches and ABK's three.  Moody's retained a negative outlook on both insurers.  Serious questions remain about the relevance of Moody's ratings system since just about everybody in America already knew that MBIA and ABK were not AAA worthy. 

Moving from the obvious to even more obvious, Citigroup's CFO announced on a conference call with analysts yesterday that the company would be taking further "substantial" write-downs for subprime morgages, leveraged loans, and other garbage in the second quarter.    Furthermore, the bank could face another credit value adjustment from its exposure to the aforementioned bond insurers.  As if that weren't enough, worsening consumer credit quality could have a meaningful impact on Citi's results for the rest of the year. 

Not to be left out of the headlines, Wachovia announced it was liquidating an investment fund called Ultra Short Opportunities due to an 18% loss this month.  This fund was marketed as an alternative to a money market fund as it had a short duration and was supposed to offer a slightly higher yield with a similar risk profile.  In retrospect, I'm certain that the fund's investors are sorry that they tried to get an extra couple of basis points while risking an 18% loss in one month.  I smell a lawsuit.

UBS can't seem to stay out of the headlines either.  Former UBS-private-banker-turned-Justice -Department-canary Bradley Birkenfeld claims he helped UBS clients hide $20 billion in assets from the IRS.  Mr. Birkenfeld insists that his actions were common among his former colleagues at UBS.  UBS has suffered considerable losses in its investment banking arm.  It was dependent on the private banking arm to maintain its reputation.  This investigation may prove to be a bigger problem for the bank than its subprime losses.