The troubles facing the bond insurers, also called monoliners keep mounting, and further downgrades keep looming on the horizon. Warren Buffett's offer last week to be paid for taking over responsibility for USD 800bn in municipal bonds did little to ease concerns. The primary source of the current stress among monoliners is their exposure to mortgage-backed securities - not their exposure to municipal bonds. Reports that investors have begun to shun Auction Rate Securities, ARS, which constitute around USD 330bn of the USD 2,200bn municipal bond market, is yet another indication that perceived risks of further downgrades among monoliners are on the rise.
Leveraged loans to finance buyouts, LBOs, have been a burden for many banks since last summer. However, the prices of these loans in secondary markets have started to decline. Last week, S&P warned that a growing number of leveraged loans are in danger of breaching covenants or defaulting. Any relief to banks' balance sheets from the LBO front are unlikely in the near term. Against this background of persistent concerns, credit spreads keep widening.
The reports last week on `material weakness´ relating to the valuation of AIG's CDS portfolio highlight that independent auditors will be particularly thorough in their auditing of the 2007 annual reports for financial institutions. In the coming weeks, similar news stories may therefore emerge as the auditing processes for the annual reports progress. In the short term, this may pull down sentiment on financials.