There’s no doubt about it: the economy is a mess. The job rate continues to rise and it seems like just about everyone is asking for support or a handout from the government. In addition, it seems like 300 and 400 point drops in the Dow are becoming the norm.
It turns out, however, that there is some good news that could end up having a positive implication for the economy at-large:
Ambac (ABK) is a company that insures bonds. Traditionally, they’ve provided bond insurance to municipalities as a way of guaranteeing high ratings for those bonds. Over the past few years, they and their largest competitor, MBIA (MBI) began to insure mortgage debt; and when the market began to tank last year, ABK and MBIA were among the stocks that were hit the hardest…due mostly to the mark-to-market write-downs that they have had to take on mortgage-based assets and the expectation that they’ll have to pay out large sums on the mortgage-base securities that they insured.
This caused a huge problem within the municipal bond industry. Traditionally, the bond insurers have been extremely stable. But they’ve seen their credit-ratings slashed in concert with their write-downs, meaning that it costs municipalities and other organizations that use bond insurance more to borrow and insure their bonds.
But here’s the good news: Ambac announced yesterday that they had reached an agreement to cancel some of those mortgage-based liabilities in exchange for a one-time payment. This will allow Ambac to reverse some of their write-downs and in parallel with that, their credit ratings should also improve. Ultimately, that will have a positive effect on municipalities, as their balance sheets will also strengthen.
And the best part? It’s expected that this transaction is just the beginning. Both banks and the insurers have a vested interest in canceling as much of these liabilities as possible. As this happens, credit markets will improve.
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