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Hyperbolic Collapse: Bond Insurers' Demise Threatens $2.6 Trillion Bond Market

Jan. 18, 2008 (EIRNS)—Alarm is increasing in the bond markets, as Fitch Ratings has downgraded the rating of Ambac, the second-largest insurer of municipal and structured bonds, by two levels—from AAA, to AA. This means that Ambac will no longer be able to insure bonds, which is the majority of its business, and will have to sell itself to a bank if it is to avoid bankruptcy.

Fitch has also threatened to downgrade MBIA, the largest bond insurer, because of new losses. Without an AAA rating, neither can insure bonds.

The loss of the AAA rating may lead to downgrades of the $2.6 trillion of municipal and structured bonds they guarantee. This would force banks to increase the amount of capital they hold against bonds, and hedges with bond insurers—at a time when giant investment banks like Citigroup and Merrill Lynch are already begging for capital from foreign investors.

Lyndon LaRouche warned that Jan. 3 and afterward would usher in a different phase of the crisis, when outside auditors would go into firms, and find losses many times higher than their own internal audits showed. Just that happened yesterday, as Standard and Poor's said that losses for bond insurers could be 20% higher than previous estimates. Meanwhile, Merrill Lynch announced the writedown of $3.1 billion in hedges with bond insurers, mostly with ACA Capital, another bond guarantor that has lost its investment-grade rating and must raise $1.7 billion by the end of today to avoid insolvency.

Under pressure from Fitch, Ambac announced on Jan. 16 that it would raise $1 billion in new equity. However, this morning, Ambac abandoned that effort, after its shares fell 70% in 48 hours.

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