AMBAC Bites The Dust…?

The Short Version

• Remember when muni bond insurance was supposedly bulletproof? Well, those days are gone
• Bond insurers went from heroes to zeros in the municipal market
• Only about 10% of new muni bonds even bother with insurance anymore
• Here’s the kicker: the market barely flinched when AMBAC hinted at bankruptcy

How Things Have Changed

Let me take you back about a decade. My muni bond broker – with all the confidence in the world – told me, “the day insurers of muni bonds can’t pay off a defaulted bond, you’ll have bigger problems on your hands.” He was basically saying it would never happen. Well, guess what? He was right about the “big problems” part.

The Market’s Collective Shrug

Here’s something wild: When bond insurers first started wobbling two years ago, the $2.8 trillion municipal bond market practically had a heart attack over their triple-A ratings being at risk. But now? AMBAC’s talking bankruptcy, and the market barely raises an eyebrow. With muni rates at rock bottom and bond pricing all over the map, the whole concept of bond insurance has become almost laughable.

The Old Days vs. Now

Back in the good old days:

• Any municipality with a pulse could basically buy a AAA rating
• Bond insurance turned AAA munis into something as standardized as breakfast cereal
• Most investors couldn’t care less about the actual underlying rating
• They just wanted their “AAA Bond” and called it a day

We’ve learned our lesson the hard way. That whole approach? Big mistake. Hopefully one we won’t repeat.

The Numbers Tell the Story

Let’s talk about how far these insurers have fallen:

• Once upon a time, seven firms strutted around with triple-A ratings
• Half of all new municipal bonds came with insurance
• Today? A measly 10% of new muni bonds have insurance
• The real gut punch? All but one (Assured) are sitting in junk rating territory

What Went Wrong?

Here’s the thing: these insurers got greedy. They weren’t content just covering municipal bonds – they had to dive into complex mortgage securities too. When the housing market took a nosedive, everything went south: massive losses, ratings in free fall, and clients running for the exits.

Where We Stand Today

The muni bond market has mostly taken its lumps and kept on ticking. Sure, AMBAC’s on the ropes, and MBIA’s posting losses like it’s going out of style (five quarters in a row, anyone?). MBIA’s even trying to spin off their public finance insurance division, but banks are crying foul, calling it fraud.

Want to see how insured bonds are trading right now? Check out BondView’s latest trading data.

Keywords: AMBAC bankruptcy, municipal bonds, bond insurance collapse, triple-A ratings, muni market crisis, MBIA losses