Fitch Again Warns on Bond Insurers

Fitch Ratings placed already-battered monoline bond insurers including MBIA(MBI Quote) back on the hot seat for the possibility for further downgrades on Tuesday.

Fitch Managing Director Thomas Abruzzo said the rating agency's rating redux is based on the new view that loss severities in the underlying components of some of the esoteric debt that monolines backstop may be even greater than estimated.

The moves will jeopardize ratings at MBIA, the nation's largest bond insurer, which Fitch placed on rating watch negative on Tuesday, and also may mean that the valuable credit ratings of other embattled guarantors Ambac(ABK Quote) and closely-held Financial Guaranty Insurance Co. could face further downgrades. Fitch already has stripped the triple-A stamp of both Ambac and FGIC, placing them at double-A.

Bond insurers use their high credit ratings to provide a so-called "wrap" or backstop against losses on debt. A loss of a credit rating means that these firms are limited to the types of business that they can underwrite and also serves to drag down the ratings of debt that they have already insured.

Abruzzo did not provide further details about the agency's rating actions or a timetable for future moves based on its new estimates on loss severities. A spokesman for Fitch said that the agency's moves are based on its own research and not on views about the health of the financial guarantor held by external parties.

Most vocal of these external parties has been hedge fund manager Bill Ackman, who runs Pershing Square Capital. Last week, the activist issued a series of reports suggesting losses at MBIA and Ambac could be in the order of $12 billion apiece.

Earlier on Tuesday, Fitch announced that it may downgrade $220 billion of collateralized debt obligations it assesses to reflect higher risks of default than the firm initially assumed.

Moody's Investors Service and Standard & Poor's, who have been accused by observers of being late to downgrade souring mortgage debt, have all taken a more negative stance of the mortgage sector of late. Moody's also said that it may configure a new way of rating mortgage-related securities, according to a report in The Wall Street Journal on Tuesday.

Fitch has informed each of its target monoline insurers how much capital they now need to shore up their balance sheets, but declined to provide that information.

Monolines insure debt ranging from municipal bonds to esoteric securities known as collateralized debt obligations. Funky debt is at the heart of the concerns about the solvency of some of these financial institutions, because worries are mounting that these firms may not have sufficient capital in place to account for anticipated defaults in mortgage debt. Guarantors insure some $2.5 trillion in securities, much of which is focused on conservative debt tied to city governments. Ratings agencies have been wringing their hands most about the more hard-to-parse portion related to repackaged mortgages that have been placed in CDOs.

Fitch's report indicates that the ratings action was completed "in light of consensus movement towards a view of increased loss projections for U.S. subprime residential mortgage- backed securities that is now held by various market participants and observers, including Fitch," the agency writes. The agency says that its review of the market is ongoing.

Meanwhile, bailouts of both Ambac and FGIC are said to be underway by a consortium of banks. Billionaire investor Wilbur Ross told CNBC that he is reviewing the monoline sector and may determine over the next two weeks his willingness to provide fresh capital to one or more firms.