Monolines appear to be the primary target in the securitization market's game of mortgage loss speculation. Sources said that revisions to rating agency criteria for guarantors and the negative outlooks that resulted were the ugliest points in 2007 for these bond insurers.

But skepticism really began to snowball last May, after Pershing Square Capital Management's Bill Ackman gave a presentation - entitled Who's Holding the Bag? - that said financial guarantors, particularly MBIA, took on risky subprime investments without a sufficient amount of reserves to maintain their triple-A ratings.

In response to market cynicism, rating agencies maintained that their ratings on the monolines reflected each guarantor's ability to endure potential losses. In the July ASR cover story Cracks in Monoline Triple-A Standards? both Fitch Ratings and Standard & Poor's told ASR that triple-A rated monolines were well insulated against losses affecting their ratings.

However, in September, Moody's published a report on financial guarantors' exposure to subprime mortgage risk that noted that AMBAC Assurance Corp., FGIC Corp., Security Capital Assurance (SCA), its subsidiary XL Capital Assurance (XLCA) and CIFG Guaranty would all need to undertake capital strengthening measures to maintain their triple-A ratings. Over the next several months, all three rating agencies scrambled to update their rating criteria and to increase their stress testing for these monolines.

As a result, rating outlooks began to align themselves with the current market sentiment. Last month, Fitch put the triple-A financial strength of SCA, MBIA, FGIC and Ambac on rating watch negative.

Moody's Investors Service also took a negative outlook on MBIA and CIFG and put SCA, its subsidiary XLCA and FGIC on review for a possible downgrade.

S&P downgraded ACA Capital Holdings to triple-C from single-A last month. The rating agency also affirmed the triple-A financial strength of Ambac, MBIA, SCA and XLCA but changed the outlook to negative. CIFG remains on negative outlook and FGIC was placed on CreditWatch with negative implications.

Monolines have since fought back to keep their triple-A ratings, which essentially gives the value to their line of business.

In November, CIFG announced a $1.5 billion capital infusion from Banque Populaire Group and Caisse d'Epargne Group, the controlling shareholders of its parent company Natixis. Assured Guaranty made a roughly $304 million public offering in December, the proceeds of which will go to its reinsurance subsidiary, Assured Guaranty Re. Also in December, MBIA announced a $500 million investment in common equity at $31 per share from Warburg Pincus. Just last week, the company said it will reduce its quarterly shareholder dividend to 13 cents per share from 34 cents per share as well as take on reinsurance that could reduce its capital requirements by $50 million to $150 million. MBIA also announced that it will be issuing $1 billion of surplus notes.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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