Last week's Chapter 11 filing by Ambac Assurance, which provides insurance on billions of dollars of MBS held by corporate credit unions (CUs), is likely to add to the price tag of the federal bailout of these wholesale institutions.
For the growing woes of Ambac — one of a half dozen troubled bond insurers that wrote insurance policies on private label MBS — means that the wrap will not be available as a growing number of MBS held by the corporate CUs go into default, increasing the losses on those bonds.
"What this means is the loss estimates they (Ambac) used to write these insurance policies were obviously way off the mark and they're not going to be able to cover the losses," said Charles Felker, managing director for credit union bond house First Empire Securities and a former corporate examiner at National Credit Union Administration (NCUA).
The Ambac bankruptcy comes as the NCUA is depositing some $50 billion of bonds held by five failed corporate CUs into trusts then using the cash flows on those bonds to create new securities known as NCUA Guaranteed Notes.
But the financial woes at Ambac and the other major bond insurers, like MBIA, Syncora Guarantee, Financial Security Assurance and Financial Guaranty Insurance Co., means that there will be little or no insurance coverage even after the bonds have defaulted, according to Felker.
In fact, Syncora and FGIC stopped paying all claims last year.