Moody's Downgrades MBIA, Ambac

Moody's Investors Service downgraded bond insurers MBIA(MBI Quote - Cramer on MBI - Stock Picks) and Ambac Financial(ABK Quote - Cramer on ABK - Stock Picks) on late Thursday, dealing the companies a serious blow to their future viability.

Moody's cut the financial strength rating for MBIA to A2 and Ambac to Aa3. Both companies had held a pristine triple-A rating. The ratings agency, which had earlier this month put MBIA and Ambac on warning for possible downgrade, also issued negative outlooks for both insurers.

The downgrades are the third from the three major credit ratings agencies for the firms, which rely on pristine credit to insure corporate and municipal debt. Standard & Poor's earlier this month cut its ratings and Fitch Ratings did so earlier this year.

The ratings agencies' concerns stem largely from MBIA and Ambac's foray into insuring esoteric, securitized debt products like collateralized debt obligations, or CDOs, which have plummeted in value during the credit crunch that has gripped markets since last summer.

"MBIA's insured portfolio remains vulnerable to further economic deterioration, particularly given the leverage contained in its sizable portfolio of resecuritization transactions, including some commercial real estate CDOs," Moody's said in a statement. "The outlook for the ratings is negative, reflecting the material uncertainty about the firm's strategy and the non-negligible likelihood of further adverse developments in its insurance portfolios or operations."

The downgrade of Ambac "reflects Moody's views on Ambac's overall credit profile in the current environment, including the company's significantly constrained new business prospects, its impaired financial flexibility and increased expected and stress loss projections among its mortgage-related risk exposures relative to previous estimates," Moody's said.

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