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.

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.

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.

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?

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.

MAJOR PAPERS:

• Two years after saying it would open about 100 new branches a year, Citigroup Incorporated (NYSE: C) has decided to drastically cut back, and will instead focus on big markets, reported the Wall Street Journal.
• Wal-Mart Stores Inc (NYSE: WMT) wants a piece of the pharmacy benefits business, the Wall Street Journal reported, and will begin an initial program to help "select employers...manage how they process and pay prescription claims," CEO Lee Scott said.
• New York insurance superintendent Eric Dinallo is urging bank executives to provide up to $5B in initial capital to support struggling bond insurers such as MBIA Inc (NYSE: MBI) and Ambac Financial Group Inc (NYSE: ABK), the Financial Times reported. Sources believe the insurance regulator is looking for leading U.S. banks to ultimately commit up to $15B.

OTHER PAPERS:

• According to the Associated Press, Yahoo! Inc (MASDAQ: YHOO) may be eyeing an online music service, two record company executives familiar with the matter said. As part of an ad-supported service, the sources said Yahoo has held talks with several major record labels to potentially offer unprotected MP3s for free or for sale.

I was surprised and pleased to see the Dow rebound this afternoon. The reason the market rebounded is simple: the New York Insurance regulatory agency met with bond insurers to discuss ways to bail them out of the little mess they're in. Count this as another victory for Jim Cramer.

Just yesterday, Cramer was making his pitch for catastrophe unless somebody saved the bond insurers who were losing their AAA rating and thus being driven out of business. Without bond insurers, all those $3.7 trillion worth of corporate bonds -- and plenty of other municipal and state bonds too -- had nobody to back them up in case the bond issuers defaulted. In Cramer's view, this was spooking the market.

But this afternoon, just as it did last August when Cramer issued the whine heard round the financial world, the government gave Cramer what he wanted. But we didn't get a complete repeat of last August -- when the Fed cut interest rates for Cramer. Today, Bloomberg News reported that the New York Insurance Department is meeting with bond insurers. This includes one of the biggest, MBIA Inc. (NYSE: MBI), which insures $2.4 trillion worth of bonds. It is likely they'll be bailed out. And the market ended up rising about 300 points.

Unfortunately, the market benefit of those government bailouts only last a day or two. What will Cramer whine for next?

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 MBIA securities.

Investors normally jump at the chance of tax free municipal bonds, and cities normally don't have any trouble funding projects they want to do using those types of bonds. Well, the bond funds have dried up for many municipalities that have lower credit ratings, according to the Washington Post this morning. Chicago was forced to cancel a $960 million bond deal, Miami-Dade had to pull a $540 million bond deal for its airport and Washington, D.C. stopped the sale of $350 million in bonds for schools, parks and roads. The municipal bond market is a $2.5 trillion market that raises funds for buildings, ballparks and other key projects for cities and school systems.

Why is this happening? Because the bond insurers, which normally would back these bonds, are overextended due to the mortgage mess. They need to cover steep losses because of the massive mortgage write-downs and they don't have the capital to insure new projects.

Municipalities have to choose between paying higher rates because they can't get the secondary bond insurance or put off intended projects. If they pay higher interest rates, the taxpayers will have to foot the bill. So many cities with lower credit ratings have decided to pull back the bond offers and delay needed projects. They face a double whammy because tax revenues for many of these cities will also drop as their core source of funding -- property taxes -- fall as the value of homes is falling.