by Calculated Risk on 12/21/2007 12:06:00 PM

From MarketWatch: Fitch warns it may cut Ambac's AAA rating

The AAA rating of Ambac's bond insurance unit was put of Rating Watch Negative by Fitch, which means the agency will downgrade to AA+ in four to six weeks unless the company can boost is excess capital levels before then. A review by Fitch of Ambac's exposure to CDOs and residential mortgage-backed securities found that the insurer is roughly $1 billion short of the extra capital it needs ...

Yesterday, Fitch put MBIA on Rating Watch Negative, and then followed up by putting "173,022 bond issues (172,860 municipal, 162 non-municipal) insured by MBIA on Rating Watch Negative". We will probably see another large number of issues on Rating Watch Negative later today.

On topic, from Bloomberg: Muni Insurance Worthless as Borrowers Shun Ambac

State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.
...
Many investment-grade munis would have AAA ratings without insurance if they were ranked the same way as corporate debt. Every state except Louisiana would be Aaa, based on the scale for companies, which ranks borrowers on the probability of default, according to the report by Moody's.

Municipal issuers are ranked on their fiscal health relative to other municipalities. Investors' increased willingness to buy state and local government debt without guarantees suggests that borrowers may not require the backing of insurance companies.
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``Taxpayers give insurers $2 billion a year because of a dual-rating scale,'' said Matt Fabian, senior analyst and managing director of Municipal Market Advisors, an independent municipal bond research firm in Concord, Massachusetts. ``You could easily save taxpayers that $2 billion by rating them on the same scale as corporate bonds.''