Thanks to a downgrade warning from Moody's, bond insurers Ambac Financial Group (NYSE: ABK) and MBIA Inc. (NYSE: MBI) are sitting out today's massive rally in financial stocks. Late Thursday, Moody's announced that it may downgrade the duo's ratings by more than one notch due to rising losses from subprime mortgage debt. So far today, the news has prompted a 7% drop in MBIA shares, and a slump of nearly 8% for Ambac.

In a statement, Moody's said, "Because both Ambac and MBIA are meaningfully exposed to the risk of U.S. subprime mortgages and other residential mortgage products, the revised assumptions are expected to have a significant impact on the firms' capital positions and multi-notch downgrades are possible." Specifically, the "A2" insurance financial strength rating of MBIA's insurance unit is under review, as is the "Aa3" insurance financial strength rating for Ambac.

Neither bond insurer seems particularly pleased by Moody's decision. Jay Brown, chairman and CEO of MBIA, said that the review reflects "inherent flaws" in the ratings company's logic, and added that his company has a capital cushion of more than $3 billion. Ambac's chairman and chief executive, Michael Callen, noted his "surprise and disappointment" at the news, and added that "Moody's ratings actions continue to cause confusion, uncertainty and the risk of material economic damange if their assumptions ultimately prove to be too onerous."

Despite today's plunge, MBI and ABK remain poised atop support from their respective 10-week moving averages. Both bond insurers have endured massive price plunges amid subprime-related fallout, but they've recently rebounded. Ambac now boasts a 60-day relative-strength reading of 381% versus the S&P 500 Index, while MBIA's is 312%.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.

The No. 1 and No. 2 spots on our underperformers' list both belong to bond insurers. Along with MBIA Inc. (NYSE: MBI), Ambac Financial Group (NYSE: ABK) has been battered bloody during the past 12 months. Prior to that, the security was riding high on a years-long uptrend, before some of its more unsavory investments came to light amid the subprime crisis.

What went wrong? At No. 1 on our list of SPX losers, ABK lost a staggering 97% of its value during the 10-year period that concluded on June 30, 2008. From its May 2007 peak of $96.10, ABK is down 98%.

Ambac's story is not too different from that of MBIA. The company enjoyed triple-A ratings, even as its portfolio grew increasingly more risky under the weight of subprime-linked debt. As of December 2007, no insurer was more exposed to bad mortgage debt than Ambac -- the company insured $22 billion of subprime mortgage debt, nearly double the exposure of MBIA.

Shares were higher today after the weekly jobless claims were reported as 357,000, down 18,000 from last week. While new claims are down, the four week average of those filing for benefits was up to 3.086 million, the highest level since March 2004. The good news is that the markets largely ignored that S&P downgrade of bond insurers today. The stock market even ignored a $5.00 rise per barrel in oil today. Here are the unofficial closing levels today:

DJIA 12,598.10 (+207.62)
S&P500 1,403.30 (+26.10)
NASDAQ 2,549.94 (+46.80)
10YR-TNote 4.03% +(0.09%)
52-WEEK LOWS
TOP 10 ANALYST CALLS

Broadcom Corp. (NASDAQ: BRCM) was an example of just how strong today was by being up almost 3% at $28.90 late in the day. If you read trough the co-founder and former CEO's indictment charges you might think shareholders would have gone the other way.

Bloomberg News reports that a bailout of Ambac Financial Group (NYSE: ABK) is going to be announced next week. Ambac rallied on speculation a recapitalization would salvage the second-largest bond guarantor's AAA credit rating. The Dow is rising -- going from being down 120 points earlier in the day to being up 97. Charlie Gasparino, CNBC's on-air editor, suggests that the deal could be announced next Monday or Tuesday.

Since no details are available, I think the market's movement reflects panicked short covering before the weekend. If Gasparino is right about this, it could help limit worries that have sent the market down almost 13% from its October 2007 high. As I posted here, the bond insurance market is a critical support system for the securitization industry. If it can retain its AAA rating, there might be some hope for limiting the downside damage.

We'll soon know whether this rumor is true.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Ambac securities.

Bond insurer MBIA (NYSE: MBI) said hedge fund founder William Ackman's proposal for a restructuring of U.S. bond insurers is no more credible or viable than his flawed open-source model, The Wall Street Journal reported [subscription required].

"Like Mr. Ackman's open-source model, his statements in the media and the barrage of letters he has sent to regulators and the rating agencies -- which contain half truths, innuendo and faulty analysis -- this proposal is simply a continuation of Mr. Ackman's campaign to profit from his short positions and credit default swaps in the bond insurance industry," MBIA said. MBIA added that it is continuing to work with New York State Superintendent of Insurance Eric Dinallo and his advisers to evaluate options for maintaining the highest rating for its policyholders.

Furthermore, MBIA, the nation's largest bond insurer, said it agrees with a spokesman for the New York Insurance Department who said Ackman's proposal would split the company and likely lead to a substantial downgrade for the structured side.

The University of Pittsburgh opted to buy back $92 million in bonds after market rates on some of its existing auction-rate debt topped 17% last week -- threatening to add $605,000 in weekly interest costs, The Wall Street Journal reported Tuesday (subscription required).

Further, the university said it may make offers to buy back almost $340 million more in debt, Bloomberg News reported Tuesday. Other good-credit institutions that have faced higher auction-market interest rates include The Port Authority of New York and New Jersey, Georgetown University and Carnegie Hall.

Auction-rate securities are long-term bonds that mimic short-term debt. Interest rates are reset in auctions held regularly, usually between seven and 35 days. Typically, municipalities, student-loan providers and museums, among others, use this type of instrument because it gives them a long-term credit source at short-term interest rates.

Jittery auction-rate market

However, these are not typical times for the credit markets. Auctions have failed when investors refused to buy the securities, and investment banks such as Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS), already laden with unwanted debt and trying to rebuild their balance sheets, refused to provide capital to support the market.

Amid calls for disclosure of more information on bidding for auction-rate bonds after dealers stopped buying the securities, two economists told BloggingStocks Friday that the problem of a lack of investor demand speaks directly to the need to re-capitalize bond insurers MBIA and Ambac.

"The problem is not merely a lack of demand for bonds. The problem is that institutional investors are shunning these investments because they are concerned about a lack of available insurance for this debt and related credit market uncertainty, which underscores the need to address the liquidity concerns of MBIA and Ambac," economist David H. Wang said Friday.

MBIA, Ambac: two linchpins

The bond insurers, Wang said, are two linchpins of the bond market [municipal, corporate], and, by extension, of the financial markets.

Shares of MBIA (NYSE: MBI) and Ambac (NYSE: ABK) have lost more than 70% of their value in the past six months, as investors have fled them amid concern that the two do not have sufficient capital to fund insurance policies for mortgage-backed and collateralized debt obligations held by banks and institutions. MBIA and Ambac executives have rejected the accusations, arguing that they have sufficient capital to fund claims and can modify/improve their business models, long-term, aided by re-capitalization. MBIA fell 80 cents to $11.82 and Ambac fell 45 cents to $10.08 in Friday afternoon trading.

New York governor Eliot Spitzer may be a lawyer by training, but he must harbor secret aspirations of becoming a financier. He will tell Congress today that the problems at bond insurance companies could become "financial tsunami" if they are not fixed.

Spitzer has a point. As Reuters points out, "if insurers are downgraded by ratings agencies, investors that can only hold top-rated bonds may have to sell billions of dollars of securities, lifting borrowing costs for cities and consumers alike." Banks might also have to write-down the value of any of these bonds that they hold on their balance sheets.

The debate now is whether the private sector should handle this on its own with banks including Citigroup (NYSE: C) providing financing to insurance firms such as Ambac (NYSE: ABK). The banks already have credit problems that could make those investments difficult.

If Spitzer truly wants to avoid what be feels will be a catastrophe he needs to say that New York State will provide the bond insurers some financial guarantees and capital. Then the banks are likely to come in.

Douglas A. McIntyre is an editor at 247wallst.com.

The Fed may have to lower interest rates again because previous cuts have failed to lower borrowing costs for many corporations and households, Bloomberg News reported Wednesday.

Despite 125 basis points of rate reductions by the Fed over a nine day span in January 2008, companies are paying more to borrow now than before the cuts, data compiled by Merrill Lynch (NYSE: MER) indicated, Bloomberg News reported.

Further, banks have been forced to abandon loan sales, student loan enterprises have had to postpone auctions, and even major municipalities have had to increase the interest rate they offer on bonds to attract investors reluctant to take on additional debt instruments amid subprime asset defaults and constrained credit market conditions. Economist David H. Wang told BloggingStocks Wednesday in a normal market the Fed's rate cuts would have lowered short-term borrowing costs and enhanced liquidity. It has not happened, which all but guarantees another rate cut by the Fed on March 18.

"We're definitely going to need another shot [interest rate cut]," Wang said. "The only question now is whether the Fed goes 25 basis points or 50. Credit market conditions are way too constrained. It's one thing to have a bond deal on a young company deferred or priced differently on risk factors, but this business of Sallie Mae's auctions failing to generating interest is just a ridiculous situation, frankly. It shows just how irrational the market has become, short-term."

Confidence in the global economy fell for the third straight month in February 2008, as North Americans became more pessimistic about the slowing U.S. economy and its impact on global growth, Bloomberg News reported Wednesday.

The Bloomberg Professional Global Confidence Index fell to 14.3 in February 2008 from 21.0 in January 2008, Bloomberg News reported. Further, although North America respondents were the most pessimistic about economic conditions in their region, Asia respondents were the most pessimistic about the global economy.

Global equity markets have lost more than $6 trillion this year as investors fled financial and cyclical stocks on fears mortgage and mortgage-asset defaults will continue to slow both U.S. economic growth and also restrict access to credit that corporations need to conduct business and expand operations.

MBIA Corp. (NYSE: MBI) remains confident that it can keep its AAA ratings and brushed aside suggestions by hedge fund investor William Ackman that it's on shaky financial ground.

"Our anticipation in response to the turn in the market has been singular among the monoline insurers, putting us in the best position to maintain our AAA ratings among the large public companies," The Wall Street Journal quotes CEO Gary Dutton as saying.

Those bullish comments were enough to give a lift to MBIA's shares, which are down almost 80% over the past year, along with rival Ambac Financial Corp. (NYSE: ABK), down almost 87% for the year. For now, the market ignored the $2.3 billion fourth quarter loss which included a whopping $3.5 billion in write down in its credit derivatives portfolio.

Ackman, who is pledging his short-selling profits to charity, argues that the Armonk, NY-based company faces losses of $11.63 billion from asset-based securities nearly equal to the $11.61 billion losses looming at Ambac. MBIA , which says it's on track to raise $2 billion, scoffs any suggestions that it may be insolvent. CFO Chuck Chaplin told the paper that it has enough capital for the next six years.

Is this a sucker's rally or the real deal?

New York State Insurance Superintendent Eric Dinallo has been twisting the arms of major banks to get them to put up $15 billion or so to bail out Ambac Financial Group (NYSE: ABK) and MBIA Inc. (NYSE: MBIA). If the muni bond insurers cannot maintain their high ratings with agencies like S&P, the value of the bonds that they insure could drop sharply, leading to more write-offs at Wall Street firms.

S&P has now said that the $15 billion may be just fine. "The dollars we understand that he's talking about -- $5 billion immediately and $15 billion ultimately -- those are substantial numbers and I think could give us a fair degree of comfort relative to resolving any issues about capital adequacy," S&P analyst Dick Smith said in an interview with Reuters.

The fact of the matter is that no one knows how much money will be needed because no one is certain how much worse the credit crisis and mortgage debacles may get. That, in turn, is likely to make big banks gun-shy about writing checks for money that they may not have themselves. Most are in the market raising funds to save themselves.

The value of the two big muni bond insurers could still go to zero and the big banks my not want to see all of that capital disappear.

If New York State wants to act, it should bring capital of its own to the table and not ask the banks to carry the whole load.

Douglas A. McIntyre is an editor at 247wallst.com.

As criticism mounted Friday that the U.S Federal Reserve may have at least partially 'jumped the gun' with a large 75-basis-point rate increase after U.S. stock markets plunged early Tuesday, economists and analysts say the Fed is unlikely to deviate from its easing monetary policy path, even though some evidence suggests Societe Generale's unwinding of a rogue bank trader's unauthorized trades may have contributed to Tuesday's plunge.

The Dow plunged more than 400 points in the first hours of trading Tuesday, following massive sell-offs in Asia in Europe on Monday, and the Fed, concerned about the impact of potential market crash on an already weakened U.S. economy and financial system, responded with an emergency-meeting, 75-basis-point rate cut for both the Fed Funds rate, to 3.50%, and the discount rate, to 4%.

Societe Generale factor

However, on Thursday Societe Generale, France's second largest bank, announced that on Monday and Tuesday it had unwound trades of a rogue trader's unauthorized -- and losing -- trades, which cost the bank almost $7.2 billion, The Associated Press reported.

Yesterday, the market rebounded from down 300 to up 300 points on the strength of rumors of a bailout for bond insurance companies like MBIA Inc. (NYSE: MBI). But today's article in the New York Times suggests to me that there may be less there than meets the eye. That's because the report says that insurance regulators are trying to raise $15 billion from Citigroup (NYSE: C), Merrill Lynch (NYSE: MER) and Goldman Sachs Group (NYSE: GS).

Is anybody home? In case anyone forgot, Citigroup and Merrill bot announced huge losses and are scrambling to raise capital. Citi lost $1.99 a share and Merrill lost a cool $12.01. Fortunately, they've recently raised $18.7 billion and $12.8 billion respectively from Sovereign Wealth Funds (SWFs). But as a Citi investor, I don't want it turning around and investing that capital in yet another subprime-related house of cards.