AMBAC Bites The Dust…?

About 10 years ago my muni bond broker said the “day insurers of muni bonds cant pay off a defaulted bond you will have bigger problems on your hands” , implying such an event would never happen. Well he was right about big problems.  Bond insurers sent shudders through the $2.8 trillion municipal bond market when the threat to their internal triple-A credit ratings surfaced two years ago. But now that one of the biggest, Ambac, has said it may actually tip into bankruptcy, the market  barely cares.  With muni rates at all time lows, and bond pricing all over the place, bond insurance is a laughable notion. Up until  a few years ago any old municipality could buy a AAA bond rating bond insruance  helped  foster an environment where the AAA muni was  a commodity that was  easily traded. Many investors didnt care about the all important underlying rating of a muni and instead bought by issuing insured bonds. The underlying rating was meaningless since buyers thought they just wanted a commodity: The AAA Bond. We know now that  was a mistake, hopefully never to be repeated.

In the heyday of bond insurance, seven firms carried the top credit rating of triple-A, and half of new municipal bonds carried insurance. Now, barely 10% of new muni bonds have insurance. None have retained triple-A ratings and all but one, Assured,  have junk ratings! Their downfall came after the top insurers branched out to guarantee complex mortgage securities. When the housing market tanked, insurers saw their losses grow, their ratings fall and their clients flee.

What does this mean for today?  The muni bond market has largely taken its losses and has withstood the turmoil seen with the weakest of the insurers. Besides Ambac,  MBIA  posted its fifth straight quarterly loss earlier this year and its public finance insurance spinoff  is being challenged by banks, which say such a split is fraudulent.  Here is a list of  today’s insured bonds  trading info from BondView