Moody’s downgraded two bond insurers yesterday, Ambac and MBI. In the bizarro world that is bonds, a bond rating is dependent not on its own financial strength, but on the rating of the insurer. So, a downgrade on the insurer means all the bonds they insure get downgraded too.
Thus, all the billions of dollars of swaps and agreements the insurers have with other financial companies now are assumed to be riskier. It’s this counterparty risk that has Wall Street nervous today.
Why should you care? Because, among other things, this will increase interest rates.