MBIA has been downgraded by Moody’s all the way to A2. Ambac is AA3. That makes their insurance useless, and in all probability that means they are now nothing more than vehicles for paying off the claims of their existing contracts. The Muni issuers will terminate their contracts, the underlying credits are already better than these two companies ratings. If they don’t, it means their situation has likely worsened. That leaves them with only the highest risk Muni bonds in their portfolio remaining.
The other part of their business is already pretty much dead. As long as the number of defaults doesn’t increase they will probably have enough money to pay off the claims for expected losses on their credit default swaps. The problem? Expected losses are rising. Most prominently on various mortgage backed securities.
Likely outcome- These two go under eventually, a number of mortgage backed securities and other fixed income securities will eventually go under without MBIA and Ambac being able to pay the claims, those who purchased the insurance will be pressured and some may default themselves down the road. This is not cataclysmic but it is a big issue and will make things worse.
Suggested readings:The end of MBIA and Ambac?, Downgrades Come Easy, Upgrades Come Hard, Upgrades to AAA? — Forget It., On the MBIA, Ambac Downgrades; Regulatory Comments on MBIA, MBIA Downgrade Increases Collateral Requirements; Clarification on CDS Acceleration in Insolvency/Custodianship, MBIA: Moody’s Twists the Knife
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