The great Ambac wait is over -- but will it matter?

As you might, possibly, maybe be aware, there's a bond insurance company called Ambac Financial Group. It has been in the process of trying to bolster its capital level in order to maintain its AAA ratings stamp from major ratings agencies Moody's and S&P. Major banks are helping Ambac out because the loss of the AAA stamp would likely result in even more writedowns than the banks have suffered already.

So what just happened today? Per Bloomberg ...

"Ambac Financial Group Inc., the bond insurer facing a crippling credit-rating downgrade, plans to sell $1.5 billion of common stock and equity units to bolster its capital.

"The sale will be split into $1 billion of shares and $500 million of units, New York-based Ambac said today in a statement. The offerings will be managed by Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG, Ambac said in a filing.

"Ambac is seeking to stave off a downgrade of its AAA rating after posting record losses on subprime guarantees. The loss of Ambac's top rating would cast doubt on $556 billion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings. By helping Ambac raise money, the banks are also helping themselves avoid writedowns on the Ambac-insured debt they own.

"It's imperative that they don't allow this kind of link in the financial system to blow up,'' said Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York. "No one wants to have the municipal market fall apart and at the same time there are fears of banking sector instability.''

Moody's Investors Service on Feb. 29 said it would probably affirm Ambac's Aaa rating if its "capital strengthening activities'' are successful. The New York-based ratings company said it was continuing its six-week review pending an agreement. Standard & Poor's said last week it is reviewing Ambac's rating for a downgrade, pending a capital raising."

Just for some historical perspective on the potential cost of a AAA loss ...

"Banks would lose as much as $70 billion if the top-rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated in January. MBIA's ratings were affirmed by Moody's and S&P last week. FGIC lost its AAA at all three ratings companies.

"MBIA retained its top rating after the Armonk, New York- based company raised $3 billion, agreed to stop insuring asset- backed debt for at least six months and said it would separate its municipal and structured finance businesses within five years."

Now the question is: "What happens next?" Do the credit markets simmer down in the wake of this Ambac news? We shall see. After an initial rally on the news, the stock market has reversed and is now in the red (Incidentally, the Dow has had something like 10 "Ambac bailout imminent" intraday rallies in the past several days). Treasury bonds are also regaining some ground after falling sharply earlier.