If the bond insurers split into pieces in an attempt to save municipal bonds (like those issued by where you live) then Wall Street investment banks and the like will be forced to take more multi-billion dollar writedowns. Expect them to squeal like stuck pigs at the prospect of this happening. Ditto for shareholders in the companies. Expect lawsuits. Because no one is quite sure if the bond insurers can legally split into separate parts.

In the meantime, parts of the municipal bond market have frozen solid because no buyers exist. Would you buy a bond if you thought if might be downgraded shortly or be shown to have no insurance because the insurer is collapsing financially? Didn’t think so.

The Temptations have something to say to this, even if they said it 38 years ago.

Oh, great googalooga, can’t you hear me talking to you.
Just a ball of confusion.
Oh yeah, that’s what the world is today.
Woo, hey, hey.

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After weeks of pretending otherwise, it’s becoming obvious the bond insurers can’t be bailed out. Both the numbers involved and the risk are too high for that.

Some major U.S. banks are saying they are prepared for this, but what of smaller banks, pension funds, state and municipal accounts, and the like? Many of them do not have the resources to withstand the big financial hits that will come when bond insurers get downgraded.

Deutsche Bank CEO: Bond insurer downgrade will create debt “tsunami”

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Look out below. The downgrades of bond insurers have begun. This downgrade means the start of more write-downs for banks. Just how much, no one knows. It also means that bonds that were AAA rated are no longer.

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This could be a financial nuclear bomb. Seriously. The major bond insurers are in serious trouble and losing spectacular amounts of money. Ambac, the 2nd largest, just announced a 4th quarter loss of up to $32.83 a share. I’ve never heard of a loss that big, have you? MBIA, the largest bond insurer is in similar trouble.

In a serious twisted piece of financial chicanery, any bond insured by a bond insurer takes on their financial rating. The bond itself could be toxic garbage, but if AAA-rated Ambac insures it, then that bond becomes AAA too. How cozy.

The problem is, the bond insurers now are in serious danger of losing their AAA rating. If (when?) that happens, we will be in uncharted territory.

Losing the AAA stamp would cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of debt the industry guarantees, causing as much as $200 billion in losses, according to data compiled by Bloomberg.

Among other things, municipalities routinely insure their bonds. This allows them to offer the bond at a lower interest rate, thus keeping their expenses down. Without insurance, any bonds they issue will have to be at a higher, more expensive rate of interest - at precisely the same time they are getting revenue shortfalls due to the real estate slump.

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