Well it finally happened, Ambac (ABK) has filed for chapter 11. My January 2008 article titled “It’s all over for Ambac” turned out to be a tad premature. Remember the two largest rating agencies, S&P and Moody’s kept its AAA rating on Ambac until June of 2008 (Fitch downgraded in Jan 08). Remember Warren Buffett’s famous quote at the time?
When a company issues a 14% bond when US Treasuries are below 4% and is rated AAA, you’ve now seen the cow jump over the moon.
There was an enormous amount of stupidity going around in the financial industry in the last decade but it was hard to top the idiocy at the monoline insurers. Remember they were called monolines because they basically did one thing, they wrote insurance on muni-bonds, that is bonds issued by states, cities and local municipalities. Insurance from the monolines gave the municipalities the AAA rating they desired, the AAA rating lowered the municipalities borrowing costs sufficiently to more than offset the fees paid to the monolines for this service. With typically very low default rates on muni-bonds this was a sweet business.
However it seems a near monopoly business with a licence to print money is not enough, at least not in the heady days of the mid oughts. So management brought in the financial whiz kids who advised them to start issuing insurance on credit default swaps, after all the premiums were so much bigger. We all know how that turned out and almost 3 years later the chickens have finally come home to roost.