Ambac Financial Group (ABK)

Once Ambac loses its AAA raing, its business is dead. Why would I insure a BBB bond with an insurer that has just an A rating? Moody’s Investors Service on Friday downgraded the debt rating of key bond insurers MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK), increasing expectations that more write-downs are in the offing for the U.S. financial-services sector, which has already written off nearly $400 billion in losses.

Moody’s Investors Service, subsidiary of Moody’s Corp. (MCO), downgraded MBIA to A2 from Aaa, and Ambac from Aaa to Aa. The downgrade caused MBIA shares to shed more than 13% of their value, with an 86-cent decline to close at $5.59 on Friday. Ambac shares fared a bit better, gaining 2 cents to close at $2.05.

Moody’s downgrades follow similar reductions from Standard & Poor’s and Fitch Ratings Inc.

Ambac's main insurance unit lost its top credit ratings last month, which forced the insurer to post $506 million of additional collateral and end $270 million of investment agreements.

If the insurance unit is downgraded more than two steps by Standard & Poor's or more than one step by Moody's, Ambac would need at least $1 billion to post additional collateral and close out obligations, the company said. It would not have enough assets in its investment agreement asset portfolio to cover that $1 billion

Ambac said it does not expect these downgrades, but said it is talking to the Wisconsin insurance regulator about how to use assets from its regulated subsidiary to pay back obligations if it is downgraded below these levels. Ambac believes regulators will approve its plans.

The era of 'risk free' profits through financial engineering is coming to an end. Risk is now being recognized, while it was hidden in long documents earlier. Even if Ambac pulls through, the business is on it's last legs.

The era of 'risk free' profits through financial engineering is coming to an end. Risk is now being recognized, while it was hidden in long documents earlier. Even if Ambac pulls through, the business is on it's last legs.

The credit crunch will destroy Ambac.