Think about it this way. Most of you have insurance - for health, your car, your possessions or your home. Assume something bad happened and you needed your insurance company to pay up, and when you went to them for your settlement, they wouldn't answer the phone, and you were on your own.
Welcome to Ambac and MBIA. They insured the debt of the cities of the United States. And now they're going belly up, and the cities will have a tough time funding new projects and issuing new debt. And $700 billion of insured debt is now walking across the grand canyon without a net.
And now a whole new round of "mark-to-market" will need to happen at the financial institutions that are already on the brink of failure. I just heard Cramer on MSNBC say that when these two fail, "they won't be able to open the market" and a 2,000 point drop in the Dow was likely. Wow.
The whole leveraged house of cards is collapsing HP'ers, piece by piece. Believe it or not, we're still just getting started.
Ambac Downgraded, Cities Seen at Risk
A downgrade of bond insurer Ambac Financial Group Inc. is likely to have far-reaching effects, making it more difficult for cities to issue new bonds and forcing further write-downs at financial services companies, analysts said Friday.
Since late last year, when the agencies first raised the prospect, analysts have suggested any move to cut Ambac or MBIA below "AAA" could be disastrous. The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions, said Donald Light, a senior analyst at Celent LLC.
"Bond insurers are the lynchpin holding together valuations of portfolios of all kinds of financial institutions," Light said.Warren Buffett's Berkshire Hathaway could be one company that gets a boost. Buffett launched a new bond insurance business in December that has a "AAA" credit rating and a solid balance sheet. Buffett's new company also has the benefit of having no questionable loans on its books.