Stocks Climb as Ambac, MBIA Keep Ratings

Stock prices rallied Monday as Standard and Poor's affirmed the AAA rating of bond insurers Ambac Financial Group and MBIA. Investors feared a downgrade of the bond insurers' ratings could trigger the forced selling of bonds, leading to more losses for troubled banks.

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STEVE INSKEEP, host:

Another kind of insurance has been in the news in recent weeks. Bond insurance companies are in the spotlight because of their involvement in messy mortgage securities. And now, in a new development that's calming Wall Street - for the moment - two of the nation's biggest bond insurers have managed to hold onto critical top marks from a credit rating agency Standard & Poor's.

NPR's Wendy Kaufman has more.

WENDY KAUFMAN: Years ago, bond insurers such as MBIA and Ambac mostly guaranteed that cities and states paid off their bond holders. Not a very risky business. But in recent years the bond insurers started to guarantee complex securities backed by home mortgages. And, as we all know, there've been lots of defaults by homeowners. The bond insurers have had to pay out large sums, and they're likely to face additional defaults in the future.

But on Monday, Standard & Poor's said it had concluded that even under very pessimistic scenarios MBIA and Ambac could pay off on their guarantees. Thus, the two firms retained their coveted triple A ratings.

Hayne Leland, a professor of finance at the University of California-Berkeley explains.

Professor HAYNE LELAND (Finance, University of California-Berkeley): It's a reflection of the fact that they either have recently achieved or are likely to achieve in the near future additional infusions of equity which basically provide additional reserves to back up their insurance.

KAUFMAN: But the triple A ratings came with some reservations. While MBIA was removed from credit watch, Ambac was not and will continue to be carefully monitored for a possible downgrade.

Still, the fact that these industry giants retained the highest rating calmed investors, who had worried that downgrades could trigger a vicious cycle, a fore-selling of bonds, leading to more losses for the big banks and increased credit costs for consumers, city government and others.

Wendy Kaufman, NPR News.

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