Wall Street Breathes A Sigh Of Relief
Kurt Brouwer February 25th, 2008
We had a solid rally today primarily due to good news on the monoline insurance companies — Ambac & MBIA. These companies began insuring municipal bonds and always did well in that field. They shifted to ensuring other more dicey offerings tied to subprime loans and ran into difficulties. Despite the problems, Standard & Poor’s re-affirmed Ambac’s rating as an insuror and that was all the good news Wall Street needed [emphasis added below]:
Stocks Rise As Ambac Rating Affirmed (Associated Press, February 25, 2008, Joe Bel Bruno)
“Wall Street bolted higher Monday after Standard & Poor’s affirmed its ratings for Ambac Financial Group Inc. and MBIA Inc., raising hopes that troubled bond insurers will emerge from the credit market crisis on solid footing. The Dow Jones industrials rallied nearly 190 points.
The news came as a relief to a market that has fallen sharply in recent months on any negative news about the insurers; investors feared that a downgrade of the insurers’ credit ratings would lead to billions of dollars in write-downs of securities held by already troubled banks and investment firms. Rating agencies including S&P have been under pressure to downgrade the insurers after they weakened their financial positions by insuring subprime mortgage securities that later collapsed.
There has been speculation that Ambac might find sufficient capital early this week to hold onto the stellar “AAA” rating it needs to remain in the municipal bond business. Municipalities and companies use these insurers to back bonds, allowing them to get higher ratings and cheaper financing.
“This is essentially evidence that S&P has signed off any tentative deal,” said Charlie Smith, chief investment officer at Fort Pitt Capital Group, of the rating agency’s announcement.
…The Dow rose 189.20, or 1.53 percent, to 12,570.22.
Broader stock indexes also closed with a solid advance. The Standard & Poor’s 500 index rose 18.69, or 1.38 percent, to 1,371.80; and the Nasdaq composite index added 24.13, or 1.05 percent, to 2,327.48…”
This is a relief rally so it remains to be seen how far it goes. Nonetheless, the rating affirmation on Ambac is good news.
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