Jim Cramer appearing on Chris Matthews' "Hardball" earlier this evening (1/18/08) warned and stated that Ambac and MBIA, the two largest insurers of municipal bonds and other numerous types of debt securities in United States, insuring no less than $450-555 Billion of municipal bonds, are within 2-3 weeks of insolvency/bankruptcy. (Yes those were Mr. Cramer's words). Kramer went on to state that no one is talking about this issue and that failing immediate government intervention or a plan for the same, their bankruptcy/insolvency could very well result in a 2,000 point DOW loss. Cramer further stated the demise of Ambac and/or MBIA could send the stock market into a panic situation and could possibly even close it down. It is important to note: Cramer was speaking of the very possible insolvency of Ambac and/or MBIA, not just a credit rating downgrade.
The purpose here is not to cry wolf, but rather to report this is the first instance of anyone in the MSM suggesting such potential dire consequences.
Before anyone begins thinking this is overblown, Tuesday this week (1/15/08) Ambac closed at $21.14, Today,(1/18/08), Ambac closed at $6.20(1/18/08), a decline of 70% within three days.
Ambac's Recent Stock Prices
MBIA's last four day 50% price decline/melt-down is also nothing to write home about.
Today's Breaking news concerning Ambac: "Standard & Poor's" Research Update of January 18, 2008, to wit:
Research Update:
Ambac Assurance Corp. Ratings Placed On Credit Watch Negative
(Diarist's Note: Ambac retains its AAA rating but as follows:
"AAA/Watch Neg/-- " (See Defintion of 'Credit Watch Negative' Below)
Rationale
On Jan. 18, Standard & Poor's Ratings Services placed Ambac Assurance Corp.'s (Ambac) financial strength, financial enhancement, and issuer credit ratings and Ambac Financial Group Inc.'s senior unsecured, issuer credit, and hybrid security ratings on CreditWatch with negative implications.
At the same time, Standard & Poor's placed the preferred stock ratings of the committed capital facilities supported by, and for the benefit of, Ambac on CreditWatch with negative implications.
These actions follow this morning's announcement that Ambac Financial
Group is not proceeding with a planned $1.0 billion equity offering due to
market conditions. Based on the results of our latest stress test, published on Jan. 17, Standard & Poor's identified a capital shortfall of approximately $400 million in new capital in applying our ratings criteria. In our opinion, the decision not to proceed with the equity offering is symptomatic of an environment in which Ambac's capital-raising options are impaired. At the same time, the amount of additional capital that Ambac may need to sustain our view of the current ratings could continue to increase, reflecting the uncertainty surrounding the ultimate levels of subprime and other mortgage-related losses.
Ambac continues to explore capital-raising options, but it is increasingly
uncertain whether it can implement any of these over the near term. To the
extent that Ambac is unable to raise sufficient capital over the near term in relation to its increased capital needs, these ratings could be lowered.
LINK
Definition of "CreditWatch"
CreditWatch highlights the potential direction of a short- or long-term rating. It focuses on identifiable events and short-term trends that cause ratings to be placed under special surveillance by Standard & Poor's analytical staff. These may include mergers, recapitalizations, voter referendums, regulatory action, or anticipated operating developments. Ratings appear on CreditWatch when such an event or a deviation from an expected trend occurs and additional information is necessary to evaluate the current rating. A listing, however, does not mean a rating change is inevitable, and whenever possible, a range of alternative ratings will be shown. CreditWatch is not intended to include all ratings under review, and rating changes may occur without the ratings having first appeared on CreditWatch. The "positive" designation means that a rating may be raised; "negative" means a rating may be lowered; and "developing" means that a rating may be raised, lowered, or affirmed.
The most telling event of S & P's Report is Ambac's announcement that it was not proceeding with a planned $1.0 billion equity offering due to market conditions. Given all of the recent infusions of billions of dollars of capital (foreign aid/snark) into America's financial system over the past weeks by foreign governments, foreign government funds, etc., one has to assume there was a very good reason/excuse why AMBAC could not raise a paltry $1B.
The consequences of an Ambac and/or MBIA credit downgrade and/or demise has been previously discussed here, including:
It's beginning to look a lot like Recession everywhere you go
New $2 Trillion Crisis Looming on the Horizon
Subprime Pain Now Hurting Life Insurers
I watch Jim Cramer's "Mad Money" and am well aware of his MO, however, with all due respect, his appearance on "Hardball" this evening, dovetailing with what has been previously posted here at the D Kos, and S & P's placement of Ambac on "Credit Watch Negative" should give us all cause for concern. I am not a bond trader or bond specialist, but understand that should Ambac and/or MBIA experience a credit rating downgrade and/or go belly up, the shock waves will be felt through every city, town and hamlet in the U.S. on account of massive downgrading of bonds as they loose their insured status. There are others here at D Kos more qualified than me to explain the effects and breadth of the fallout resulting from an Ambac and/or MBIA credit rating down grade and/or insolvency, the resulting downgrading of bonds that will follow, and the fallout of downgraded bonds on the financial community, but suffice it to say, it appears not good.