Ambac Bond Default

Anyone besides me find it fascinating that the market is ignoring the Ambac bond default announcement? This could have significant ramifications in the financial derivatives and fixed income structured finance markets. Problems with Ambac and MBIA helped precipitate the first leg of the U.S. financial nuclear meltdown back in 2008. Ambac/AIG/MBIA et al were quickly "papered over" by the Fed and the U.S. Taxpayer. It was merely kicking the can down the road. The can in the road is now back in sight and it's named "Ambac."

This morning Ambac announced that it would not make the interest payment on some of its bonds today.  It also announced that if it can not agree to a pre-pack restructuring, that it will file Chapter 11.  Here's the press release:  LINK

This is not good.  Ambac provides credit default insurance to the structured finance markets.  We know a large portion of this is riddled with extreme fraud.  Ambac has payment liabilities to the extent that investors experience losses on their structured finance investments. 

All these transactions are entangled with derivatives.  From the above link:  Hedge funds that say they own more than $1 billion of residential mortgage debt insured by Ambac Assurance are suing Ambac to prevent it from siphoning assets from that unit.

Ambac also provides credit insurance to the municipal bond industry.  This situation with Ambac could well cause big problems with Ambac's ability to fulfill, not only its structured finance obligations, but its municipal bond market obligations as well.  From the same article:  Fabian said Ambac can "at least for now" still cover most claims in the municipal market, but may have trouble in the longer term.

A Chapter 11 filing will create complete legal and financial chaos that will ripple throughout the market. It will hammer the housing market again.  Possibly the proverbial "straw/camel's back"  that we all know is coming.   I would pay close attention to this Ambac development.  I have said for quite some time now that anyone who has a lot of their wealth tied up on muni paper is taking on a massive amount of risk that is impossible assess. 

This stiuation will hasten the capital flow out of paper and into gold/silver/mining stocks.