Personal Finance Advice

CNBC reported earlier today that a bailout plan to rescue trouble bond insurer Ambac would be announced sometime early next week.  The news sparked a late rally on Wall Street even as investors cope with increasing signs of an economic slowdown.

Yesterday’s news that manufacturing activity was slowing as well as a bleak forecast on future economic growth had stocks trading down sharply until the CNBC report surfaced late in the afternoon.

There is a lot at stake for the financial sector in keeping Ambac and it’s rivals at their AAA rating level.  With the industry insuring over $2.4 Trillion in bonds that are in danger of being devalued, the ramifications of a ratings downgrade are incalculable. 

Already new bond issuance has slowed to a trickle and bonds that are being sold are doing so at sharply increased costs.  Municipalities are having an especially rough time of it, with many of them delaying their scheduled public works projects.

The biggest fear for investors is that a bond devaluation would lead to a new wave of write downs for an already beleaguered banking system.  Some analysts are estimating that bank write downs could go as high as $100 Billion.  It would pretty much signal a deathblow to any chance of our economy staying out of a recession.

Even with this bit of good news most analysts are remaining cautious.  The bond insurance industry still has a lot of exposure to sub prime debt that isn’t going to go away overnight.