Professor Elam

Monday March 8 2010

Like the rock thrown into the pool, the ever widening ripples are taking down lots of other players in the financial crisis. Ambac is a firm that 'insured' municipal bonds. The bankruptcy of the Las Vegas Monorail in February, has caused even the optimistic to wonder if Ambac can survive. The stock has already colapsed, the precursor to receivership. The problem is that the fear of across the country defaults is now so great everyone realizes, like FDIC which is bankrupt, that it is not possible to insure all the bonds Ambac claimed to cover. 

We will shortly study derivatives, a CDS is a Credit Default Swap, This is an insurance policy that cover the risk of default on the part of the issuing party. The market is bidding up the cost of CDS on Ambac betting that in fact Ambac will default.