January 18, 2007 (LPAC)--Ambac, the nation's second-largest bond insurer, was stripped of its critical AAA credit rating today by Fitch, which cut its rating two notches to A. The move came after Ambac had to abandon plans to raise $1 billion in new capital when its stock dropped by 70 percent in the last two days. Though S&P and Moody's have yet to cut their ratings on Ambac, those cuts are inevitable unless the company can find new capital, and without its top rating Ambac's business will rapidly deteriorate, as will the guarantees it provides on $556 billion in bonds, including some $67 billion in bonds issued by CDOs.

Bond insurance is more of an accounting trick than actual insurance, since the bond insurers don't have anywhere near enough capital to cover any widespread wave of defaults on the bonds they back. The bond insurers basically rent out their AAA ratings to give the illusion that the bonds they insure are sound. The wave of losses now working their way through the markets after the seizing up of the securitization scam will destroy the bond insurers, and the illusion of protection they provide. The demise of the bond insurers is a yet another nail in the coffin of a dead system.