AMBAC downgraded

In the post “The Trouble with Bond Insurers” in November last year, I mentioned my concerns about bond insurers because my municipal reset holdings were insured by AMBAC and MBIA (among others).

The downgrade has happened. Today, Fitch downgraded bond insurer AMBAC “after Ambac said it scrapped a plan to raise $1 billion in capital to cover potential future claims.” Now AMBAC is rated AA instead of AAA and also “remains on negative credit watch for a further downgrade”.

Additional article:

Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.

Prior to Ambac’s downgrade, T.J. Marta, a fixed-income analyst at RBC Capital Markets, said a downgrade of the company would lead to downgrades of all the municipal bonds it insured. Subsequently, it will become more difficult for cities, counties and other local entities to issue debt for building projects, Marta said.

Several types of municipal issuers will be most vulnerable if they can no longer secure insurance. These are borrowers like small private schools and hospitals that are not backed by a regular tax base or revenue stream. Typically, these entities have had to secure insurance to gain credibility with the public and sell their debt.

At the very minimum the troubles of the insurers will drive up borrowing costs of cities and other local entities at a time when many are strained by weaker tax revenue, said John Atkins, a fixed-income analyst at

As for my municipal reset bonds, I liquidated them some time back in December. With this latest news, could a knee-jerk reaction cause us to see a failed municipal resets auction?


  1. Mike

    You were smart to see the writing on the wall and liquidate your municipal reset bonds last year. A failed municipal resets auction is a very good possibility the way things are looking for the economy.

  2. Mike

    Here’s another view of this issue.

  3. indexfundfan (Post author)

    Mike, thanks for your views.

    Interestingly, I haven’t seen much fall in NAV of VG’s CA muni funds. Perhaps they hold much less insured-backed issues.


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