ManyPeaks.com

Ambac Financial (ABK), one of only a dozen United States corporations with a coveted AAA-rating, is in severely dire straits. They need capital because the municipal, mortgage, and asset-backed bonds they get paid to insure are defaulting… meaning they contractually must make those bond investors whole, just like an insurance claim.

But few market participants have confidence that Ambac can remain solvent. Last I heard Ambac’s own indebtedness was trading at 25% yields (Yes, they borrow money to insure other parties’ debts — what’s more American than that?).

So Ambac planned an equity offering to shore up the balance sheet. Very logical. Except one little snafu: their stock just plummeted 70% in two days. Ouch.

Further, the risk of any municipal bond insured by Ambac has surely increased — I need to speak with my bond market contacts to confirm that the prices on these securities are indeed falling (or at least spreads to Treasuries widening) but it seems like a sure thing. This will certainly make it tougher for cities and counties to borrow funds for vital projects, especially since Ambac’s issues are just part of an industry-wide problem among bond-insurers.

Debt and insurance markets are built on the confidence of being repaid.. having faith in your counterparty. When people lose confidence, the “run on the bank” begins (or in this case, accelerates).