Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that.
Moody's implied-ratings group paints a completely different picture. Using the CDS market, [David] Munves's [Moody's Analytics] unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.
Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies.
"The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC.
The rating companies say their grades are correct.
~ David Munves, managing director for credit strategy research at Moody's Analytics, "Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk," Bloomberg.com, May 30, 2008