Just My Rant

Something happened Friday that could have some extremely ugly repercussions over the coming weeks and it is one of the scariest things I have seen yet in this ugly, ugly mess of an economy. The news that really bothered me was that AMBAC’s rating was dropped two levels from AAA to AA. Now I knew it was probably going to happen and Jim Cramer from Mad Money has been screaming about them possibly breaking the law for some time, as a matter of fact he scared the hell out of the people at CNBC’s Squawk Box the other day when he went on a scathing rant about AMBAC and MBIA … you can see it here. Now I’m no expert on the bond market, far from it, but I know enough to know this is a touchy area of the economy that really needs to stay healthy! What bothers me and so many others that know what is going on with this mess of an economy is what this downgrade could mean to the economy and so many so-called rock solid bonds that have been safe and sound for so many years.

You see AMBAC is an agency that insures bonds. Between them and their competition, MBIA, they insure a combined $700 billion (yes that’s with a B) in bonds. Because of this rating cut AMBAC will not be allowed to back any new bonds, as a matter of fact the bonds they now insure could come into question and that is ten times more dangerous to the financial market than the subprime mess itself! If in fact these bonds were downgraded the loss to financial institutions could very well be devastating. Donald Light, a senior analyst at Celent has said “The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions” and then went on to say “Bond insurers are the lynch pin holding together valuations of portfolios of all kinds of financial institutions”.

And sure enough right after AMBAC’s rating was downgraded Fitch downgraded 420 asset-backed securities! What are they? Well the list is just mind boggling and you can see it for yourself here.

From state run student loan funds to rental cars this list is enough to make you sick to your stomach! This downgrade ratings means the issuers of these bonds will end up having to pay more interest because the bonds are perceived as “riskier”. What worries me is this list of 420 securities happened in one afternoon because of one insurer, should AMBAC’s rating drop further the list of bonds that will be downgraded could go on forever!

Another effect of this scenario could be the increased difficulty for local, county, city and state governments to issue bonds to finance new and or existing projects, creating a vicious circle of projects stoppages, more unemployment and cold very well trickle down into the loss of some basic services these governments provide for their citizens!

Right about now you are probably asking, what about this other company, MBIA, can’t they swoop in and help? Well in fact no they can’t for the simple fact they are struggling to keep their AAA rating at the exact same time. They have barely managed to hang on to their rating at this point and hopefully they can salvage it. As far as AMBAC? Well as I said before Jim Cramer thinks they have probably broken the law and should be hauled before congress and Jim makes another good point in that video, where the HELL is the Security and Exchange Commission (the SEC)? Why the hell isn’t the organization that is supposed to protect investors from this kind of nonsense screaming bloody murder for answers?

But I guess what really scares me is the fact that municipal bonds have almost always been the “rock solid” investment, the conservation of conservative investments yet here we are at the crossroads of shaking the very foundations of trust and credit. We will have to see how this plays out but the storm clouds are getting uglier every day. One has to think about the stories we were told about the great depression and wonder if we are close to that very same scenario right now, or worse.

Personally I have never been one of those “shit hit the fan” believers but I have to tell you I’m really starting to rethink that because every time I think there is some glimmer of hope it gets bitch slapped out of existence! I have told friends and family and I will now tell you it’s time to do some serious thinking about your well being and security! I’ll cover more about this in my next post within a day or two.

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