Fitch Ratings published a report today which delves into the exposure of major U.S. banks and broker/dealers to financial guarantors.
Fitch's analysis encompassed exposures to the financial guarantors by type of risk and by specific financial guarantor. Fitch has drawn three major conclusions: --Credit exposure to the financial guarantors is considered manageable for the major U.S. banks and broker/dealers. --Proposed initiatives to restructure certain financial guarantors could have additional negative effects on exposures. --Exposure levels vary substantially, however, and could lead to additional ratings pressure for Citigroup, Merrill Lynch and UBS, all of which have a Negative Rating Outlook from Fitch. While these institutions have recently raised sizable capital, additional write-downs may put incremental pressure on their ratings when combined with other financial challenges. Direct credit counterparty exposure related to hedges on ABS CDOs and CDS is the area that presents the greatest concern. Public disclosure on net exposures of ABS CDOs reflects material gains on CDO hedges with guarantors and other counterparties. The ratings at which the financial guarantors ultimately stabilize will be very important. The potential separation of the financial guarantors adds additional uncertainty complicating the analysis. Given the importance of the details, speculation at this time would add limited value. Fitch will reassess the potential implications for financial institutions when such plans progress toward reality.