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Mortgage Mess Mauls Ambac

The sound of credit crunching is getting louder every day.

In just the past week, Citigroup (C - Get Report) and Merrill Lynch (MER) have said they'll need to take nearly $20 billion in losses on risky mortgage-related paper.

Speculation about further writedowns has since spread to Goldman Sachs (GS - Get Report) and Morgan Stanley (MS), among others.

But so far, contrary to the hopes of stock-market bulls, the massive losses at Citi and Merrill haven't cleared the way for a fall recovery in financial stocks.

Instead, as credit ratings agencies such as Fitch, Moody's and Standard & Poor's issue warnings and downgrades on asset-backed securities and derivative collateralized debt obligations, the pain from the collapse of the subprime mortgage sector continues to spread.

Fitch Ratings on Monday called into question the capital reserves at financial guarantors such as Ambac (ABK), MBIA (MBI - Get Report) and Security Capital Assurance (SCA), along with closely held Financial Guaranty Insurance and CIFG Guaranty.

Fitch's review is due to take four to six weeks. If it cascades into full blown ratings downgrades, it could create another wave of forced selling in the credit markets -- this time in the $14 trillion municipal bond market.

"It's starting to feel a lot like summer," says Sid Bakst, senior portfolio manager at Weiss Peck & Greer Investments, and he's not referring to the weather.

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GS $189.79 0.00%
JPM $61.28 0.00%
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