IF YOU THOUGHT MUNICIPAL BONDS WERE SAFE

THINK AGAIN!!!

Bond-insurer woes may trigger more write-downs
Doubts on AAA ratings for Ambac, MBIA spark turmoil in muni bond market
By Alistair Barr, MarketWatch
Last update: 6:08 p.m. EST Jan. 18, 2008

A more worrying consideration is that when a bond insurer is downgraded, all the securities it has guaranteed are, in theory, downgraded as well.

If Ambac and MBIA lose their top ratings, billions of dollars of muni bonds will be downgraded, and the guarantees that have been sold on mortgage-related securities such as collateralized debt obligations, or CDOs, will lose value.

"The destruction of the bond insurers would likely bring write-downs at major banks and financial institutions that would put current write-downs to shame," Tamara Kravec, an analyst at Banc of America Securities, wrote in a note Friday.

There are $2.5 trillion to $3 trillion of muni bonds. Roughly half of those are insured by bond, or "monoline," insurers like Ambac and MBIA.

So more than $1 trillion of muni bonds are now in danger of being downgraded. That could trigger losses for muni-bond investors.

"Assuming the "monoline" insurers lose their triple-A ratings, underlying insured muni bonds could be susceptible to downgrades and downward repricing, leading to losses for muni-bond mutual funds," Michael Kim, an analyst at Sandler O'Neill, told investors in a note Friday.