Industry News

Financial guarantee companies have subprime exposure

Moody's warns 4 of 5 CDO insurers could face downgrades

Moody's Investors Service warned Tuesday that four out of five financial guarantee companies it covers that insure collateralized debt obligations (CDOs) have indirect exposure to subprime mortgage loans that could affect their ratings. Moody's said that five companies it provides insurer strength financial (ISF) ratings for insured $61 billion in CDOs in 2006 and 2007. The CDOs' investments include mortgage-backed securities (MBS) and asset-backed securities (ABS). If cumulative losses on mortgage-backed securities backed by subprime loans hit 14 percent, four of those companies -- Ambac Financial Group, Financial Guaranty Insurance Co., Security Capital Assurance and CIFG -- could face material losses that could lead Moody's to lower their Aaa insurer financial strength (IFS) ratings, analysts said. "AMBAC, FGIC, SCA and CIFG would all need to undertake capital strengthening measures to maintain their Aaa ratings," Moody's said in a press release announcing the report. A fifth fina...