Ambac and MBIA: Saved?

Bond insurers Ambac (ABK) and MBIA (MBI) will be in the spotlight again Thursday, a day after Bloomberg reported that New York insurance regulators are trying to arrange a rescue of the struggling companies by big Wall Street banks. The news, which was first reported Wednesday afternoon, sent shares of Ambac soaring 72 percent and MBIA up 33 percent, reversing some of the sharp losses sustained by shareholders over the past year. Regulators fear that without a recapitalization of Ambac and MBIA, billions of dollars of bonds they insure could face imminent downgrades that could force some investors - such as pension funds, which are typically obliged to own only the highest-rated securities - to sell their bonds at a loss, adding to problems mounting in the banking system.

While the talks are described as preliminary - one of several facts about the effort that Yves Smith at Naked Capitalism considers “not encouraging” - the notion that regulators are looking into the matter comes as no surprise to Jeff Miller at A Dash of Insight. He writes that the possible failure of the bond insurers is just the sort of problem to which a public policy response is predictable, yet often overlooked by investors. After all, among the $2.4 trillion in bonds insured by MBIA and Ambac is more than a trillion dollars in municipal bonds - bonds whose downgrade would serve the interests of no one. “The key point to understand is that when private errors start to have major impacts on the general public,” he writes, “government gets in gear.” With any luck, it isn’t too late for that.