World's Largest Bond Insurers Collapsing!

Martin D. Weiss Ph.D.
Money And Markets
Wednesday January 23, 2008

Martin here with an urgent update on the rapidly unfolding credit crack-up:

Ambac and MBIA, the two largest bond insurers in the world, are careening toward collapse.

Barring a miraculous rescue, their demise could promptly deliver a massive blow to the U.S. bond market ... severely damage America's already shaken big banks ... and largely trash the net worth of millions of investors.

Yet, strangely, except for investors who owned Ambac and MBIA shares themselves — and who have now driven those shares into the gutter — few are paying attention.

And fewer still are taking appropriate defensive action.

Look. If this crisis were just a theoretical possibility, like it was when I first wrote about the fatal fallacy of bond insurance years ago, I might understand the stubborn complacency of most investors.

But now it's here, staring them in the face: Just this past Friday, soon after the closing bell in New York, the watershed event happened: Ambac lost its triple-A rating!

Fitch slashed Ambac's rating by two notches to AA, downgraded the long-term rating of Ambac's parent company by three notches, and said more cuts could be on the way.

Since the ratings of insured bonds are tied directly to the ratings of the insurer, Fitch was also forced to take action on the 137,000 bonds that are covered by Ambac, setting off a veritable ratings massacre in the market for municipal and mortgage-backed bonds.

Similarly ...

If I were still one of the only ones talking about the collapse of bond insurance, I could also understand the complacency of most investors.

But now, based on the current market price of credit swaps (bets on future defaults), Wall Street itself believes that the chance Ambac and MBIA will avoid bankruptcy is less than one in three.

And still most investors aren't paying attention!

Next, Brace Yourself for the Other
Shoes That Could Soon Be Falling

First, the other two leading rating agencies — Moody's and S&P — are likely to follow Fitch's lead and also downgrade Ambac. In fact, on Thursday, Moody's already warned it could do so very soon.

Second, the other major bond insurers, such as MBIA and FGIC, will get smacked with downgrades.

Third, the ratings massacre now taking place in Ambac-insured bonds will spread to $2.3 trillion worth of municipal bonds, mortgage-backed bonds, plus asset-backed bonds packed with credit card and auto loans.

Full article here.