The biggest financial news in recent days is the Moodys / S&P downgrade of two monolines, MBIA and Ambac. Accrued Interest opines that this is long overdue as far as the current balance sheet goes, but may be related to their low share prices and general unpopularity making it hard for them to raise capital. Naked Capitalism passes along some speculation that the ratings cuts will cause massive write-offs at the brokerages.

The two monolines insure more than $1-trillion of third party debt; competition is poised to take advantage … and the politicians are grandstanding:

The companies also face competition from billionaire Warren Buffett’s Berkshire Hathaway Inc., the largest shareholder in credit-rating company Moody’s Corp. Buffett started a new bond insurer in December and is charging more than MBIA and Ambac to guarantee payment on municipal debt while avoiding the CDOs and other securities that jeopardized their credit ratings.

Macquarie Group Ltd., Australia’s biggest securities firm, also plans to form a U.S. bond-insurance company. The Sydney- based company has been in talks with the New York State Insurance Department since April to provide bond insurance in the state, Superintendent Eric Dinallo said in an e-mailed statement today.

California Treasurer Bill Lockyer and Connecticut Attorney General Richard Blumenthal are among officials seeking a change in how Moody’s and S&P rate municipal bonds. States and local governments say they were forced to buy now worthless bond insurance because Moody’s and S&P “knowingly and systematically” ranked municipal issues lower than they should have. Reform may negate the need for bond insurance.

In an announcement late today, S&P is lowering the boom on monolines:

Standard & Poor’s took negative ratings actions on the bond insurance businesses of CIFG Guaranty, Security Capital Assurance Ltd. and FGIC Corp. as the companies struggle to address potential losses on securities they guaranteed.

CIFG, stripped of its AAA rating in March, was downgraded further today to A-, while SCA’s XL Capital Assurance Inc. and XL Financial Assurance Ltd. had their financial strength ratings cut to BBB-, the lowest investment-grade level. FGIC, owned by Blackstone Group LP and PMI Group Inc., had the BB ratings on its bond insurer placed under review for a possible downgrade.

The other major story of the past week has been Lehman’s search for capital:

Lehman, the fourth-largest U.S. securities firm, has already sold bonds and preferred shares to generate $8 billion in capital since February. Chief Executive Officer Richard Fuld is trying to reduce leverage, the firm’s ratio of assets to equity, to help offset a decline in the value of debt securities. Concern that Bear Stearns Cos. faced a cash shortage pushed the firm to the brink of bankruptcy in March.

Well, they have to raise capital and otherwise delever their balance sheet. In this environment, fundamentals don’t really matter a lot. Leverage doesn’t matter, asset quality doesn’t matter, profitability doesn’t matter … you just don’t want to be the weakest broker on the Street. Look what happened to Bear Stearns! And if Bear had been unable to cut some kind of deal on the fateful Sunday evening and been forced into Chapter 11 on Monday morning, the run on Lehman would have started instantly.

Naked Capitalism is decidedly unimpressed with Lehman’s disclosure.

Bloomberg has an amusing piece on the value of sell-side analysis:

Investors who followed the advice of analysts who say when to buy and sell shares of brokerage firms and banks lost 17 percent in the past year, twice the decline of the Standard & Poor’s 500 Index.

Buying shares on the advice of Merrill Lynch & Co.’s Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor’s annual survey, cost investors 17 percent, according to data compiled by Bloomberg. Deutsche Bank AG analyst Michael Mayo’s counsel to purchase New York-based Lehman Brothers Holdings Inc. lost 59 percent. Citigroup Inc.’s Prashant Bhatia still rates Merrill “buy” after its 56 percent retreat from a January 2007 record.