By the way, sometime over the weekend the plan changed from “buying toxic mortgage-backed assets” to “let’s follow Great Brittan because they seem to know how to deal with this crisis, so let’s pump money into a few good banks like they’re doing over there across the pond”.  So that’s what we’re doing.  And the figure is now $250 billion instead of $700 or $850 or whatever it ended up being once al the rum and wooden arrow makers across the nation were settled up.  

The credit markets were closed today because of the holiday, but they open back up tomorrow.  Analysts are now looking to see if the interbank lending rates, or the rates banks charge each other to borrow each other’s money (think what needed to happen but didn’t when people ran IndyMac) will come down so that banks will again lend to each other.  Until banks again start covering each other, no one who missed one electric bill will be able to get a loan.     

The only stocks I’m ahead in right now are Radian Group (RDN), MBIA (MBI), and Syncora (SCA); the rest are one big hemorrhage.  Moody’s still hasn’t lifted their threat of downgrade of Ambac (ABK).  But to stay positive after such a positive day, at least I’ll be able to average down.  And average down I definitely will!    

Word that a second stimulus package may be on its way may have also helped boost the markets today.  Crude oil followed the rest of the market today, closing up $4.14 to $81.84. 

The #1 movie in America is Beverly Hills Chihuahua.  

????

Hindsight is 20/20, and looking back to last night, there was a clear signal the bill wasn’t going to pass: after an initial positive response, the Asian markets began to slide into red.  Real money movers always know things ahead of time, and the Asian markets’ slip was a sure signal that our bill was not going to pass. I should have seen it, and maybe subconsciously I did, but it seemed too unbelievable that the bailout would not pass given its enormity and all the long days and weekends Congress had put into it.  But as we’ve seen with IndyMac, Fannie and Freddie, and Washington Mutual, nothing is too big to fail. 

Lawmakers are headed back to the drawing board to draft up a new version of the plan, but won’t meet again until Wednesday because tomorrow is Rosh Hashanah.

I’m more of an observer now than an active player.  I’m in too deep to do anything except wait, so all I can really focus on is the day to day with the stocks I own and the stocks that those stocks are absorbing.  Citigroup (C) bought Wachovia (WB) today for $2.2 billion, or $1 per share. 

Two funny computer errors happened today: Thornburg Mortgage (TMA) put through a 10:1 reverse stock split this morning, but not before they multiplied the share price by 10.  So during today’s premarket, it looked like I had 3K extra in my account!  But the quirk was soon fixed and so was the overinflated share price.  By close, TMA was down to $1.15, which would have been 11.5 cents on Friday before the reverse split.  To buy back the preferred shares, Thornburg needs to raise more capital.  You're welcome, TMA.   

Another blip came to Wachovia’s share price today.  At one point, it listed on Google finance at $500!  Message boarders were going nuts, and that error put the financial sector up 7% and made it look like the only sector in the green.  But that error was also soon fixed, and everyone who owns WB fell back into reality. 

One last computer oddity happened at the New York Stock Exchange today: because of a glitch, the morning bell never rang.  Mary Caraccioli said she’s never seen that happen.

People are still sweating a Moody’s downgrade to Ambac (ABK).  I really hope not.  Of all problems that could happen, that one tops my concern.  Just about a month ago, I was up over 100% on ABK and now I’m in the red.  If a Moody’s downgrade comes, it’ll destroy Ambac, especially after today.     

The Dow, which opened down over 100 points in seeming anticipation, dropped 777 points today- the greatest one-day decline in its history and even greater than the drop after September 11, 2001- to close the say at $10,365.  However to see the glass 1/10 full, this was the 17th worst daily drop percentage-wise, so not quite the worst.  Crude oil fell $10.52 to close at $96.36.   

The Sydney Morning Herald reported tonight that “online broking portal Etrade ground to a virtual halt this morning [Tuesday September 30] as it struggled to cope with massive trading volumes.”  Is this a hint of more blood to come?  Damn sure it is!

*The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use.  (After the initial $250 million, an additional $100 million can be released by the President.  If after that more money is needed, Congress can re-vote on release of the remaining $350 million.)

*Curbs will be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be allowed to offer golden parachutes to executives; they will not be able to deduct the salary they pay to executives above $500,000.

*An oversight board will be created. The board will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director and the Housing and Urban Development secretary.

*Allow for the Treasury to receive the option to take ownership stakes in participating companies under certain circumstances.

*Treasury may establish an insurance program - with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 18, 2008.

Congress wanted to get the bill together before the opening of the Asian markets tonight.  The Nikkei 225 opened $10 lower than Friday's close, but then began a slightly hesitant ascent.  How the bill’s finalization will affect our market’s opening tomorrow, or if anymore bankruptcies or downgrades will occur, is still up in the air.  My guess is that there will be a sigh of relief across all sectors tomorrow but any real change will only happen after the bill is signed, sealed and the money is delivered. 

Will Ambac (ABK) avoid a Moody’s downgrade before the relief comes through, and when the relief comes through, will it help ABK?  Message boarders seem to think the price of ABK will skyrocket tomorrow, and the very late-day increase in ABK’s share price on Friday may have hinted belief that a weekend deal would in fact help ABK come Monday.  But the “Moody Monster” is still lurking in the woods.  Analysts are blaming a lot of the financial crisis on these ratings agencies for rating companies way higher than they deserved, therefore needing to make drastic corrective downgrades.  On March 20, 2001, Frank Raiter, Standard & Poor’s former top mortgage official, said he was asked by S&P to rate a real estate investment he had never even reviewed.  He told Bloomberg that he was told to “just guess” because the S&P was in competition with other ratings companies (possibly Moody’s?) for fees on a $484 million deal.  It’s good that ratings are being revealed as little more than smoke and mirrors, but people still take ratings seriously, and a Moody’s downgrade of Ambac would devastate the company and its stock price.     

And will the news of consensus on Capitol Hill save Wachovia (WB) from going bust before another bank picks up its fractions?  Or will we remember Wachovia as the last big victim of the "credit crunch"?  We'll have to wait to see… 

Back in Ratings land, one ABK message boarder claimed that the Feds raided Moody’s on Friday looking for connections between the ratings company and hedge funds.  No link was provided, and given that any Joe Schmo can go on a Google Finance board and post whatever he or she pleases, it could very well be completely fabricated.  However, a Bloomberg article titled “Berkshire's Bond Insurer, Moody's Stake Face Probe”, reports that one such link may in fact come to light:

“Billionaire Warren Buffett's Berkshire Hathaway Inc. faces a probe by Connecticut's attorney general for possible conflicts created by owning almost 20 percent of credit ratings company Moody's Corp. while also running a new municipal bond insurer. 

Moody's gave its top rating last week to Berkshire Hathaway Assurance Corp., created in December as existing bond insurers struggled to maintain their AAA ratings. A favorable rating for Berkshire by New York-based Moody's, or a lower rating for competitors including MBIA Inc. and Ambac Financial Group Inc., may give Buffett's company an advantage.”

So maybe there is truth in rumor. 

In other news, Barclays is the proud new owner of Lehman Brothers’s investment banking and trading businesses.  The $1.75 billion deal approved yesterday is a definite bargain as compared to the one Barclays would have had to strike last week for Lehman’s entire assets before bankruptcy.      

The SEC banned ALL short selling- regular and naked alike- of 799 financials for the next 10 days.  The United Kingdom temporarily halted short selling yesterday, and the US did the same.  This is a huge step from just banning naked shorting; this is a total ban on betting that stocks will lose value, essentially disqualifying half of the game.  Hillary Clinton and Charles Schumer, both New York Senators, proposed the ban.  Critics say this ban will warp the market, making it seem as if the financial stocks are worth more than they are.  But when naked shorting was banned in July, the effect lasted long after the ban was lifted.  In fact, it lasted right up until last week when AIG teetered and fell and dragged the entire sector along with it.  So in a market that is so emotionally driven, a little banning may do the trick to snap the depression (no pun intended).

Henry Paulson, our Treasury Secretary, and Federal Reserve Chairman Ben Bernanke proposed the idea to spin all bad parts of financial institutions into its own entity- a black hole of badness.  This idea reminds me of that story I had to read in high school about the utopian society that was only a utopia because of the little girl who lived in a cage in the basement of someone’s house.  Remember that one?  I was never big on reading, so titles slip my mind.  I just remember the girl in the cage and the annual field trip every schoolkid would take to see the girl in the dirty dark cage dungeon as a reminder of why they lived as perfectly as they did.  I wonder if part of the Paulson and Bernanke plan will have the American people visiting the dark entity once a year.  Oh wait, now I get it.  We will be visiting once a year- at tax time.  Seems these two guys kept up on their high school reading. 

Meanwhile in Ratings Land, Moody’s threatened to downgrade Ambac (ABK) and MBIA (MBI), which dropped ABK 42% and another 27% in afterhours, and MBI 8% and another 8% in afterhours.  The ABK message boards caught fire, and it seems Moody’s may catch some of it by Monday, if not sooner. 

Do you know the name of that book yet?  Maybe it was a short story. 

Yertle’s not really 7,000 years old; actually I have no idea how old she is.  She could be 7,000, she could be 70.  All I know is that I’ve had her for 12 years and she’s about the same size as when my friend first handed her down to me, which leads me to believe she’s probably older than anyone would guess and that I’ll have to will her to someone when I die. 

Europe and Japan are reportedly headed towards their own recessions, but Bloomberg reported that our economy- possibly fueled by exports to these struggling regions- grew faster in the second quarter than originally calculated.  This boosted today’s market big time.  Trading is thought to have been the biggest contributor to the growth of the economy in the quarter, and a bigger contributor than it has been in 30 years.  Well no kidding!  Everyone knows to get in at the bottom!

My car got towed today because I was on the wrong side of the street for street sweeping, and it wasn’t until I got to the tow lot that I realized I had my debit instead of my credit card.  So I got back on my bike, rode back home, got the card, rode back to the tow lot, and paid them $117.47 (on top of the $40 ticket this fair City slid under my wiper) to bail my car out of car prison.  If it wasn’t for MBI and Ambac (ABK), which came out of the cut today with a 41% gain sometime between the tow fiasco and when I finally sat back down to look at everything, I would have been way more pissed.  Street sweeping.  Please!  Five seconds after the zambonie passes, trash is back on the street.  What a joke. 

The stars align once in a while in the financials sector, and today was one of those days.  Thursday August 14 was the last time it happened.   Today’s massive gains were a combination of the revised economy numbers, MBIA’s good news, and the Bloomberg report that “Crude oil fell more than $2 a barrel after the International Energy Agency (IEA) said it would tap strategic stockpiles, if needed, because of Tropical Storm Gustav.”  Forecasters are now predicting Gustav will turn Category 3 and is headed straight to Louisiana.  Oil crashed at 11AM because of the IEA’s announcement, then took a bit of a bounce around noon, but the damage was already done.  The Dow gained 212 to end the day at $11,715, oil lost $2.56 to end the day at $115.59, my stocks pulled in $1,700, and so probably ended the week's rally.  No doubt the profit takers will enter the market tomorrow.   

"This transaction will provide substantial benefits to the policyholders of FGIC, who can now rely on MBIA’s financial strength, substantial claims-paying resources and established operating platform," Armonk, N.Y.-based MBIA said. "For MBIA, the reinsurance transaction leverages our core public finance business and our existing surveillance and remediation expertise, and provides attractive returns while strengthening our balance sheet."

Of course, not everyone was impressed. At FT Alphaville, Sam Jones noted that municipal bond investors have taken to ignoring whether a given issue is backed, or "wrapped," by one of the issuers on the grounds that the exposure of these insurers, also known as monolines, to potential mortgage-related losses may reduce their ability to pay claims down the road. That means firms' business of taking in premiums to wrap bond issues is in jeopardy, to say the least.

Even so, MBIA and Ambac are still alive and kicking, in spite of well-publicized claims they would be insolvent by year-end. The companies' survival offers an interesting parallel to the Fannie-Freddie story. In both cases, the bearish view of the stocks gained such currency that a government bailout or other such equity-crushing event was widely taken to be at hand.

But while the alarmists were right that all four companies face substantial losses as real estate prices deflate, the fears that sent their shares plunging seem to have overlooked the degree to which all the housing finance companies have time on their side.

"Because the losses are payable over many years, while the investment portfolios generate steady investment income, there doesn’t appear to be any imminent threat of a liquidity induced bankruptcy; both companies are quite cash flow positive," a major shareholder in Ambac and MBIA reasoned back in July, when Ambac stock was fetching $1 and change and MBIA was around $4. "Moreover, were the losses to suddenly decline, it’s quite possible that the companies could be reporting significant earnings per share."

There's certainly no sign that housing-related losses are about to decline, or that either MBIA or Ambac - not to mention Fannie and Freddie - is on the verge of posting huge earnings gains. Given the risks ahead, buying the shares in any of the companies is not for the faint of heart, let's say. But with Ambac recently fetching $6 and MBIA back in the mid-teens, it's certainly plausible that momentum may be with Freddie backer Bill Miller for awhile yet.

Shares of Silver State Bancorp (SSBX) fell 25% today on news that their second quarter loss was miscalculated and was actually larger than reported.  Ouch.  Google message boarders think the bank will go bust.  Its 52-week high is $19 and SSBX is currently trading at just 62 cents.  My very scientific calculation of dividing the current share price by the 52-week high yields the tiny fraction 0.0326, which tells me, in a very scientific way, that this thing is at least a decent bet and at most a real money-maker.  I’ll keep my $77 worth of shares until the real bottom is reached, then maybe average down.      

When starting this experiment, I set two goals for myself: to have a $1000 day, which happened yesterday, and to hit $10,000 by October.  Today I hit the second goal two months early, thanks mostly to the bond insurers PMI, ABK, MBI, RDN, and SCA.  So what now?  Let it ride!  I honestly wasn’t sure $10,000 would ever happen.  But it did.  So what’s the next goal?  I like base 10. 

The Dow moved sideways today to close the day up 44 points to $11,659.   Oil closed down $1.24 today to $113.77 on news that world demand is down.  Wasn’t demand in developing countries reportedly way up a month ago?  Wasn’t that the reason oil was at $140 a barrel?  Gee, things sure can change in a month!  Please, it’s all speculation. 

Whoo hoo, Friday!  I'm headed out of Massachusetts for the first time in a while. 

The latest quarter was helped by an unrealized pretax gain of $3.3 billion, reflecting a writedown of the value of MBIA's liabilities following the bond insurer's June downgrade by Moody's and S&P. Rival Ambac (ABK) posted a surprise profit earlier this week for the same reason, as the downgrade - which essentially prevents the companies from writing any new credit enhancement business - led to a sharp widening in the spreads on the credit default swaps of their insurance units, and a decline in the fair value of their credit guarantee portfolios due to rising market perceptions that the companies wouldn't be able to stand behind their guarantees. The liability writedown, which benefits earnings, comes after two quarters in which both MBIA and Ambac posted multibillion-dollar writedowns of their assets, which led to massive losses at the companies.

MBIA also maintained its forecast for a 2009 peak for house price decline-related losses, just two days after big mortgage investor Freddie Mac (FRE) backed away from its own credit loss projections.

“While the deterioration in the housing and mortgage markets continued over the past three months, it has been consistent with what we projected when we established reserves and impairments for our housing-related portfolio in the first quarter,” said CEO Jay Brown. “As such, we did not increase our loss reserves or credit derivative impairment estimates during the second quarter beyond our normal accretion adjustments and quarterly loss reserving formula."

MBIA shares, which have doubled off their panic lows following the downgrades after a long fall over the past year, rose 8% in early trading Friday.

Last Friday, Ambac Financial Group Inc. announced that it will settle 850 million worth of CDOs with Citigroup. Ambac said it has suffered 1.0 billion in mark-to-market losses against this one transaction.

Speaking of Citigroup Inc., the largest bank by assets may be willing to compensate auction rate securities holders for their frozen assets--about $ 8 billion, according to Bloomberg. Citigroup faces a legal battle with some states looking to prove that Citi, along with Merrill Lynch and UBS, defrauded investors who held ARS securities.

Also last week, Merrill Lynch & Co. said it was selling mortgage-backed securities to a hedge fund for about 22 cents to the dollar just as the housing bill was signed.

MBS, ARS, CDO...the selloff by these three companies all stem from very different circumstances. But their actions may set a trend as others look to cleanse faulty assets from the balance sheets. Slim down all the way now to begin bulking back up. Will this represent the bottom for many of these companies' stocks? Will they be able to afford their high write downs? One positive sign is that market participants are beginning to trust each other again. One of the causes for the Bear Stearns collapse and government intervention was that Wall Street did not trust assets at stake. There seems to be some clarity surrounding the toxic securities, and that companies are trusting, lending and trading again. It will be interesting to see if this trend trickles down to the home buyer. Today's mortgage rates have not followed the Federal funds rate's lead as hoped. Maybe now the credit and trust afforded to large companies will be granted by lenders to the general public.

FRE was no doubt the market mover today, but by 12:30PM the shock on some of the other stocks seemed to have worn off and NCC, RDN, RF, SCA, and WM all joined ABK on team green.  I passed out on the couch for a couple hours and woke up to find the Dow, MBI, MTG, and PMI also on team green but C back in the red.   Trader. 

PMI reports earnings tomorrow, and so does Centerline Holding Company (CHC), a stock I have hesitated on getting into because of its low trading volume but nonetheless has been doing well.  It gained nearly 19% today to $1.76 per share with a 52-week high of $16. 

The Dow closed up 40 points to end this strange rollercoaster ride of a day at $11,656.  Oil officially slipped into bear country today closing down another 59 cents to $118.58, over 20% off its all-time high just one month ago.  The dollar hit a seven month peak!  I closed up $150.    

The news is good because Ambac had already written down the value of the deal by $1 billion. So settling the contract for $850 million leaves the company, which has suffered two straight multibillion-dollar quarterly losses, with a $150 million gain on a transaction that might have otherwise appeared to have been a black hole. The Citi transation appeared particularly risky because it covered a so-called CDO-squared transaction. CDO-squareds -- which are among the riskiest deals created by Wall Street during the credit boom -- are collateralized debt obligations made up of other CDOs, which in turn are made up of different slices of mortgage-backed securities.

"The primary benefit of this agreement is that it eliminates uncertainty with respect to future losses related to this transaction," said CEO Michael Callen. "We view the final outcome as favorable in light of the numerous widely circulated models that assumed a 100% write off for this transaction. This settlement also confirms our view that transaction mark-to-market adjustments are not indicative of ultimate credit impairment."

The move comes just days after Merrill Lynch (MER) stunned Wall Street by agreeing to sell a $30.6 billion CDO portfolio for as little as 6 cents on the dollar, depending on how you do the math tied to the firm's agreement to finance the sale to vulture investor Lone Star Funds. That deal was viewed by some as showing that mark-to-market adjustments haven't been overstated, though others saw hope in Merrill's ability to find a buyer for highly distressed paper.

Ambac itself has taken billions of dollars of mark-to-market writedowns, most of which it says it expects to reverse over time. While that view may yet prove optimistic, what with house prices falling and the economy slowing, Ambac's deal Friday shows at least some progress in working through the financial sector's bad-debt overhang.

"We are concerned by Moody’s announcement at a time when Assured is experiencing broad market acceptance and investor demand for our insured paper," said CEO Dominic Frederico. "We believe it is important for investors to know that Moody’s action is not at all reflective of a deterioration in Assured’s capital base, credit exposures or earnings outlook."

Ross made headlines in February when he shunned the two struggling U.S. bond insurers, MBIA (MBI) and Ambac (ABK), and instead plowed $250 million into Assured Guaranty shares at $21 and change. Since then, Assured Guaranty has been writing new business while Ambac and MBIA have largely been sidelined by investor concerns about their financial strength. But now, with Assured Guaranty stock fetching $10 and a downgrade possible there as well, it's less clear that Ross backed the right horse.

Some financial institutions did fire risk managers or at least blamed their risk management department for the unforeseen impact of the crisis. Any risk manager should have had a strategy in place that manages situations in which market mechanisms stop functioning. Risk managers know that VaR calculations do not cover extreme events. In the past the LTCM case, an analysis can be found here, already showed that markets can stop functioning. The best risk management department off course predicts when such events are likely to happen and enable a company to profit from such events. It looks like only Goldman Sachs managed to do this.

But what to do when the CEO starts making decisions that are conflicting with business ethics and that increase legal risk? The credit crisis interactive analysis shows that integrity issues are the most threatening and most damaging problems for a company. Just take a look at the events at Bear Stearns and Countrywide or remember what happened at Enron. These type of problems are difficult to manage by a company's internal function, whether it is risk, compliance, audit or the board of directors. The internal functions simply do not have the power nor the authority to withstand a CEO. The board of directors are often at too much distance to remain in touch with the operational reality and at the same time they are often to close at the personal level to remain independent. UBS recognized this, be it a little late.

The credit crisis will probably result in more legislation or more focus at Basel II pillar three. Shareholders and employees became victims from inadequate management. Senior management however often walked away with millions of dollars. Big reward at no risk!

Some examples:

• O'neal from Merrill Lynch rewarded with $160 million leaving his bank in real trouble.
• Groenink from ABNAMRO rewarded with $ 40 million leaving his bank to be split into 3 pieces.
• Charles Prince from Citi rewarded with almost $ 100 million
• Sullivan from AIG rewarded with $ 47 million severance package
• Angelo Mozilla to profit from sale to BofA.. estimations vary but are in the range of several tens of millions.

Today Yahoo! reports that Countrywide employees fear for their severance pay.When will the first employee out of a job due to failing management start a lawsuit demanding equal severance pays?
:: :: :: :: :: :: :: :: :: ::

The credit crisis interactive analysis covers more than 350 credit crisis or subprime events and the functionality allows you to investigate it from different angels. I've been using it myself and some interesting patterns show up. It has been tested with Explore and Firefox 3.0. It works on both, but Firefox is much faster.

The ratings cuts have been long anticipated by the so-called monoline insurers' many critics, including hedge fund manager William Ackman, who indicated earlier this week he has moved on to bet against another insurer, FSA. Moody's move comes just two weeks after the rating agency said it would review the insurers for a possible downgrade. Rival S&P then beat Moody's to the punch, downgrading MBIA and Ambac. That move prompted MBIA to say it wouldn't put $900 million of capital it raised earlier this year into its insurance unit. It hopes instead to invest the cash in a new insurance business that would have the triple-A rating it needs to write new business - something Ambac and MBIA are unable to do now, because of their falling ratings and negative outlooks from the rating agencies.

Analysts have been concerned for some time about the prospect that Wall Street banks will face a new round of writedowns as debt guarantees written by the insurers lose their value. But MBIA's shift has opened up a whole new debate about the financial strength of the insurers, and how regulators and investors might respond to their plans to deploy capital. "I don’t see good things ahead for the guarantors," David Merkel writes at his Aleph Blog. Shares of the companies, which have each lost more than 90% of their value over the past year, were off again Friday, with MBIA down 9% and Ambac down 2%.

Are these downgrades the proverbial nails in the coffin?

On the plus side, Merrill Lynch has won a summary judgment in a dispute with another bond insurer, Security Capital Assurance's (SCA) XL Capital Assurance. Merrill had sued the insurer, claiming it improperly attempted to terminate $3 billion worth of credit default swaps without basis. XL said Merrill entered into the deal simply to make its books look better, but the judge threw out XL's counterclaims, The Wall Street Journal reports. The decision means XL will have to honor the swaps. "We're pleased by the judge's decision in this matter," Merrill said.

"The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility," S&P wrote. "In addition, we believe continuing deterioration in key areas of the U.S. residential mortgage sector
and related CDO structures will place increasing pressure on capital adequacy. The 'AA' financial strength ratings of these companies are supported by currently sound claims paying ability and liquidity levels in our opinion."

On Wednesday, the companies responded to Moody's review announcement within minutes, with Ambac pronouncing itself "disappointed" and MBIA saying it "disagreed." Presumably we can expect more of the same this afternoon.

That's not to say the companies are taking the news particularly well. MBIA said it "disagrees" with the possible downgrade, despite the hefty losses it has taken in recent quarters. It resolved to blame Moody's for its problems, saying it "can only conclude that the requirements for a triple-A rating continue to change." The company conceded that it has had little success writing new business in recent months, but it lays that at the feet of the ratings agencies as well.

"Our business volume had been slowly building since the affirmation of our ratings by S&P and Moody’s in late February," MBIA says. "However, when Moody’s announced on May 13th its intent to revise its assumptions on 2005-2007 vintage subprime second lien mortgage products, our new business production again dropped precipitously."

For its part, Ambac said it is "disappointed" but offered investors a thimbleful of hope by saying it has "no current plans to raise additional capital." Of course, you'd have to sell an awful lot of Ambac shares at $2.49 a pop to raise any serious money. And both MBIA and Ambac have long insisted the risks in their portfolios have been vastly overstated by skeptics talking their books.

But there are those who have been saying for some time the bond insurers should simply accept their fate and figure out how to operate as double-A or single-A-rated entities, rather than further diluting their shareholders in the name of fleeting success in managing the expectations of the ratings agencies.

Andrew Moloff, chief investment officer at MBIA and Ambac shareholder Evercore Asset Management, wrote in a January letter to Ambac's board that pursuing a plan to raise new capital with shares trading at multiyear lows "amounts not so much to raising capital as it does to a sale of the company at an extremely depressed price." Ambac proceeded to raise $1.5 billion in March anyway, in an offering that Evercore and other existing shareholders bought into in a bit of unhappy dollar-cost averaging.

Since then, Ambac and MBIA shares have dropped even further, as real estate prices continue to slide, raising the prospect of further mortgage defaults and additional losses on the mortgage-backed securities the companies insure. Even Ambac's success in March in raising capital didn't cause business to tick up, because "issuers seeking insurance have thus far opted to insure with competitors with stable triple-A ratings," Ambac said back in April. With the long-awaited downgrade finally at hand, perhaps Ambac and MBIA can stop posturing about what's the right rating for them and figure out how to win back some customers.