Potential Ambac Bankruptcy Will Likely Affect Gold and Silver Markets

On Monday, November 1, Ambac Financial Group issued a news release stating that it may file for bankruptcy protection by the end of 2010.  This announcement followed a decision by the company’s board of directors to skip making an interest payment on senior notes that was due that day.

Ambac and its subsidiaries were one of the two major companies that sold insurance to guarantee payments on mortgage-backed debt.  As you are no doubt aware, the company has experienced unprecedented levels of claims as record numbers of homeowners have defaulted on their mortgages since 2007.

In March, the Wisconsin insurance commissioner, whose office regulates the Ambac Assurance Corp. subsidiary, seized $64 billion of Ambac’s most troubled assets.  Last month, he filed a plan to establish a segregated account of these assets so that they could only be used to pay off Ambac’s bondholders.  Hedge funds holding more than $1 billion of residential insurance mortgage debt have filed suit to prevent that subsidiary from using these assets to repay bondholders instead of for settlement of claims.

Ambac and MBIA were the two largest companies selling policies to insure against bond and other derivatives defaults.  Their losses in 2008 helped spark the early leg of the financial meltdown.  Along with insurer AIG, the US government (meaning the taxpayers) provided hundreds of billions of dollars to prop up these insurance companies.

Besides providing insurance on derivatives, Ambac also issues policies that guarantee repayment of municipal bonds.  The losses from residential mortgages could impair Ambac’s ability to cover the growing level of losses in this market niche.

If Ambac does not make this interest payment within 30 days or reach a negotiated settlement with senior bondholders, then it will automatically enter Chapter 11 bankruptcy protection.  If the company does go into bankruptcy, that would unleash a new tidal wave of financial chaos that would ripple through the housing and municipal bond markets.  The almost certain result would further reduce residential housing values and hurt the ability of governments to issue new debt.

Almost certainly, as bond and derivative values plummet, that would scare more investors away from owning paper assets and toward owning physical gold and silver and shares in gold and silver mining companies.

This development with Ambac received absolutely no coverage in my local newspaper.  A short story in Tuesday’s The Wall Street Journal focused only on the mechanics of the possible filing for bankruptcy.  But, it completely avoided any discussion of the ramifications such an event could have on the US economy as a whole.  This could be one of the major financial stories in the next month, yet the news coverage thus far is next to non-existent.

Maybe we could let the mainstream media off the hook this time because of all the coverage devoted to the elections.  If that is true, however, it makes me even more worried about how many more unreported financial bombshells are out there waiting to explode in the coming weeks and months.

If you don’t yet have physical gold and silver to protect yourself from further declines in other assets, I recommend you take immediate action.  Physical silver inventories are tightening and I expect the same to happen with gold.

Patrick HellerPatrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

Comments

  1. says

    This is not good.
    I have found that the things you need to know are the things the mainstream media does not want you to know.
    The Ambac bankruptcy introduces a higher level of risk in the financial markets.
    Reminicent of 2008.
    Note to self: Add to gold and silver holdings.
    Thank you

  2. G says

    You have this story entirely wrong. Ambac the holding company is not Ambac the bond insurer. Ambac Assurance Corporation is the subsidiary and the bond insurer. It has already fallen on hard times. In March it split itself into good and bad sides through the creation of a segregated account. Most of the RMBS insurance is on the bad side in the segregated account and most municipal debt is on the good side in the general account. The segregated account is in rehabilitation under the Wisconsin insurance commissioner and will pay claims at 25 cents on the dollar. So far, claims in the general account remain unimpaired. The bankruptcy will have no direct impact on the insurance company. And absolutely no affect on gold and silver prices.

  3. John Kennedy says

    Mr. Heller, with great respect for you, I must point out that the newspaper to which you are likely referring is not local. The Lansing State Journal is published by Gannet and the vast majority of its content comes from Gannet News Service and the Associated Press. Both of these organizations are left-leaning legacy media outlets. Neither has has ever made an effort to responsibly report on precious metals markets or free market economics.

    Keep doing what you are. Your writings are informative and liberating.

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