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.