The FINANCIAL — According to Dow Jones, the top five U.S. broker-dealer banks have a combined $23 billion (EUR15.7 billion) in uncollateralised exposures to AAA counterparties, part of which is with monoline bond insurers that have been weakened by the sub-prime mortgage crisis.
Monolines insure $2.3 trillion of debt, including structured credit and municipal bonds, according to research by Swiss bank UBS.
The credit ratings of monolines Ambac Financial Group Inc. (ABK), ACA (ACAH) and Security Capital Assurance (SCA) have been downgraded in the past two months, which last week led New York State Insurance Superintendent Eric Dinallo to table a protection plan for the sector.
Analysts at Bernstein Research have questioned the strength of Wall Street's sub-prime hedges, which are now under pressure and may need to be replaced, raising the risk of more writedowns.
Merrill Lynch & Co. Inc. (MER) is the only bank to have reported losses in relation to its exposures to monolines, and Bernstein expects more if the outlook for monolines deteriorates further.
The U.S. bank wrote down $3.1 billion of the assets in the fourth quarter last year after monoline ACA, to which it had an exposure, had its credit rating downgraded to junk status.
The value of hedges held by banks with monolines has risen sharply and in line with the fall in value of the underlying CDOs that the monolines had insured.
Brad Hintz, senior analyst at Bernstein Research in New York, said in research last week: "The banks have therefore built large receivable positions from the monolines and effectively have large chunks of assets on their balance sheets, which are unsecured loans from this vulnerable set of companies."
Credit default swap spreads on the two largest monolines, Ambac and MBIA have widened to over 1,500 basis points.
Merrill Lynch had an estimated $7.1 billion uncollateralised exposure to AAA counterparties, Morgan Stanley (MS) had almost $7 billion, Goldman Sachs Group Inc. (GS) $4.7 billion, Lehman Brothers $4 billion and Bear Stearns Co. (BSC) had $330 million at the end of last August, according to Bernstein Research data based on company disclosures.
Merrill Lynch disclosed that about 50% of its hedges were written by monolines.
Discussion about this post