The Fed cut interest rates 50 bps yesterday but the big news was the downgrade of FGIC which lost its AAA rating. The equity market rallied on the Fed cut, but sold-off on the FGIC announcement. Bonds rallied strong on the FGIC announcement after selling off on the Fed cut. Of course, the Fed cut was to a large extent discounted in the market, so it was the surprise of FGIC that caught the attention of the market. The structural issues are also more important to the finance community than the cost of funds.
The cost of funds has decreased from all of the Fed cuts, but in the short-run, the write-down of assets is more important to the capital bases of financial institution and investors. The credit crisis is not about rates but about the access to new capital and the valuing of existing loan portfolios. Cuts in the rating of bond insurer will have an immediate impact on the value of any bonds that have been protected. Of course, the market has already discounted most the AAA rating for this bonds, but now investors will have to truly realize the loses. There is no going back to AAA.
MBIA posted its biggest quarterly loss and needs to raise capital. This is what will drive the market and not the lowering of funds by 50 bps. If MBIA loses its AAA rating, it will have an impact on over $650 billion in investments. If the government wants to help with this problem, it needs to think about the capital base of these insurers.
The cost of funds has decreased from all of the Fed cuts, but in the short-run, the write-down of assets is more important to the capital bases of financial institution and investors. The credit crisis is not about rates but about the access to new capital and the valuing of existing loan portfolios. Cuts in the rating of bond insurer will have an immediate impact on the value of any bonds that have been protected. Of course, the market has already discounted most the AAA rating for this bonds, but now investors will have to truly realize the loses. There is no going back to AAA.
MBIA posted its biggest quarterly loss and needs to raise capital. This is what will drive the market and not the lowering of funds by 50 bps. If MBIA loses its AAA rating, it will have an impact on over $650 billion in investments. If the government wants to help with this problem, it needs to think about the capital base of these insurers.
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