The impact of
recent credit ratings downgrades of No. 1 and No. 2 bond insurers MBIA Inc. and Ambac Financial Group Inc. has made its way into the banking arena. Citigroup Inc., Merrill Lynch & Co. and UBS all sunk on Wednesday following a Financial Times report that the three banks could face up to $10 billion in new write-downs due to their significant exposures to the Ambac and MBIA, which insure their risky structured finance holdings. MBIA and Ambac last week lost their triple-A ratings from Standard & Poor's and were put on review for possible downgrade by Moody's Investors Service. Citi on Wednesday fell 5.18% to close at $19.21 per share, UBS fell 3.54% to $22.62, and Merrill slipped 6.56% to $35.46.
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MBIA fell 3.18% Wednesday to close at $4.85. The bond insurer Wednesday said it may not use the $900 million in proceeds for an equity offering earlier this year to raise capital as the S&P downgrade is not pegged to its capital cushion but rather lack of new public finance and structured finance business prospects and "declining financial flexibility."
Security Capital Assurance Ltd., parent of monoline XL Capital Assurance Inc., was hit hardest among the monolines, shedding 26.92% of its value to close at 38 cents per share. XL lost a legal dispute against Merrill Lynch in which the monoline will be required to honor its $3.1 billion of guarantees on collateralized debt obligations it insures for Merrill. A U.S. District Court judge for the Southern District of New York ruled on Tuesday that Merrill had not repudiated its obligations under seven credit default swaps it entered with XL and that XL's attempts to terminate those swaps was not valid.
Happenings at the New York Southern District Court have had a varied impact on the Street Wednesday. Railroad operator CSX Corp. fell 4.03% Wednesday to $63.60 following a ruling in the court in favor of CSX's
battle with activists the Children's Investment Fund and 3G Capital, who are seeking to unseat five board members. The court ruled that the hedge funds violated regulatory disclosure rules by accumulating positions in CSX by using financial derivatives without notifying the company. The funds will still be able to vote their shares in the upcoming annual meeting.
The broader market plummeted on a $5.07 increase in crude oil to $136.38 per barrel. The Dow Jones Industrial Average fell 205.99 points to 12,083.77. - Michael Rudnick
