Ambac, MBIA Still in the Dumps: Is It Safe?

NEW YORK (TheStreet) -- It's easy to forget that, as we record the one-year anniversary of Lehman Brothers' failure, the writing had been on the wall since January 2008.

After all, credit default swap prices of Ambac Financial Group(ABK Quote) and MBIA(MBI Quote) indicated the standard-bearer bond insurers had more than a 70% chance of failing.

Lehman, the largest mortgage bond underwriter, was forced to start buying credit default swaps to hedge against the bankruptcy of bond guarantee insurers, and, as a result, credit default swap prices rose dramatically. Shares of Ambac and MBIA plummeted. This past January was a hellish nightmare for Ambac and MBIA. Their stocks were down 93% and 88%, respectively, in 12 months.

Ambac and MBIA went on the defensive. Ambac decided not to raise additional capital to protect its rating, lost its chief executive officer -- and had its ratings downgraded anyway. MBIA resisted, but eventually succumbed, to a ratings cut. There's no market for insurance from bond insurers without AAA ratings because the point is that an insurer guarantees the bond, thus reducing the cost of borrowing to the issuer.

Throughout the ordeal, MBIA remained publicly baffled by rating-agency actions, clearly unable to see that January 2008 hosted the appetizer for the upcoming Lehman and American International Group(AIG Quote) entree. By the end of the summer, the markets were poisoned, and there was no way to stop the inevitable.

But the patient survived. If the stock market is recovering and the credit market thawing, the living hell for bond insurers continues. Ambac abandoned its efforts to set up a ring-fenced business to start offering new bond insurance from January 2010 when it became clear that there was no new capital available.