Saturday, January 19, 2008

AAA bond insurance evaporates

Ambac Financial abandons it's capital raising plans, and promptly get cuts to AAA. But if you want to insure AmBac or MBIA against default, check out what Bloomberg had to say. To paraphrase Julian Robertson, "It's a doosy!"

Credit-default swaps tied to MBIA's bonds soared 10 percentage points to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.

The price implies that traders are pricing in a 71 percent chance that MBIA will default in the next five years, according to a JPMorgan Chase & Co. valuation model.
Contracts on Ambac, the second-biggest insurer, rose 12 percentage points to 27 percent upfront and 5 percent a year, prices from CMA Datavision in London show.
Ambac's implied chance of default is 73 percent, according to the JPMorgan data.

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