Bond insurers in trouble


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.