Bond Insurers Getting Hammered by Credit Default Swaps

Why are bond insurers MBIA and Ambac getting hammered?

You guessed it: credit default swaps.

As an article today in Bloomberg puts it:

MBIA and Ambac, previously the world's two biggest bond insurers, lost their top AAA ratings earlier this year because of potential losses on credit swaps sold to guarantee CDOs [collateralized debt obligations] backed by home loans. Moody's Investors Service cut New York-based Ambac's bond insurance rating four levels yesterday to Baa1, three steps above junk, because of potential losses on the derivatives.

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MBIA, the Armonk, New York-based insurer crippled by ratings downgrades earlier this year following losses from such contracts, has said it sold $126.3 billion in guarantees on slices of CDOs backed by corporate bonds, mortgages and other debt. Ambac sold $60.7 billion in guarantees on these so-called tranches, mostly through credit swaps, the company said.