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Home > Cases > ABS & CDO Investment Losses > Fitch Ratings Downgrades Ambac Assurance. More to Come?

Fitch Ratings Downgrades Ambac Assurance. More to Come?

A new fissure in faltering credit markets hit Wall Street on January 19, 2008. That's when Christine Richard of Bloomberg.com reported that Fitch Ratings had downgraded the credit rating of Ambac Assurance Corporation's credit rating from AAA (the highest rating available) to AA. Ambac and other insurers play a critical role in maintaining investor confidence. By providing financial guarantees on government bonds, they grease the wheels for capital funding on public infrastructure projects and other state and municipal projects. Ambac underwriters evaluate proposed transactions before insuring them, to assure that ratings are acceptable, issuers are reliable, repayment is properly funded and economic projections are on target.

But in January, Ambac's own financial position faltered after the insurer abandoned plans to raise new equity. Fitch consequently downgraded about 140,000 municipal and non-municipal bonds insured by Ambac. It's a move that makes Wall Street bankers, traders and regulators fear the worst.

Ambac may be downgraded further, says Fitch. In a doomsday scenario, Ambac would be forced to stop writing the bond insurance that comprises 74% of its revenue, according to the Bloomberg article. Others would follow suit, and as the credit ratings of MBIA and other bond insurers tumbled, massive amounts of bonds would lose value. Call it the Titanic effect. Pray it doesn't happen.

One reason municipal bonds are considered safe investments is that municipal bond insurance policies guarantee the payment of principal and interest on a bond if the issuer defaults. Since the financial stability of bond insurance companies is critically important to the bond market, those companies are rated by Standard & Poors, Moody's, and Fitch. The most desirable bonds are the ones insured by an AAA-rated insurer. Until January 19, there were seven AAA-rated bond insurers. Today, there are (How many? Have others been downgraded since Jan19?)

Says Bloomberg: “The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion according to data compiled by Bloomberg. The industry guaranteed $100 billion of collateralized debt obligations linked to subprime mortgages, $22 billion of on-prime auto loans and $1.2 trillion of municipal debt.”

The potential for losses in the bond markets as a result of these downgrades is enormous. Merrill & Co., the world's largest brokerage firm, recently took $3.1 billion of writedowns on the value of default protection from bond insurers.

Like municipal bonds money market funds are typically thought of as a safe haven for risk-averse investors. Some money market funds have also been downgraded because of their exposure to subprime debt.

The subprime wallop has succeeded in destabilizing the “safest” pillars of the market. Who's responsible? What's next?

We'll keep you posted.

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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