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That’s it then.

NEW YORK (Standard & Poor’s) June 5, 2008–Standard & Poor’s Rating Services today lowered its financial strength ratings on Ambac Assurance Corp. and MBIA Insurance Corp. to ‘AA’ from ‘AAA’ and placed the ratings on CreditWatch with negative implications.

Along with those two institutional cuts, $1000bn of bond issues will also lose their triple A’s.

Alas, did anyone really care? And was that perhaps the point in waiting until now to downgrade? Astoundingly, shares in MBIA and Ambac rose on news of the cut. Ambac was up 5.2 per cent at close of trade in New York and MBIA was up 7.3 per cent. While cathartic, it’s still ridiculous: these. are. broken. businesses.

All perhaps testament to the disconnect - at least in understanding - between equity and credit.

But there wasn’t even a flutter in T-bill trading either - which might have been expected, given the sheer size of bond downgrades the market is being loaded with. The muni bond crisis is already over, and most have priced in loss of bond wraps.

How much exposure then, does Wall Street have? Broadly, analysts don’t seem to be expecting anything serious, but for the banks there’s also the issue of those convenient, today-slightly-less-valuable structured finance hedges to take into account.

Yves Smith produces a note with some pretty alarming figures, but it’s worth remembering that a lot has been written down against monoline swaps already and writedowns in the hundreds of billions are not going to materialise. Merrill, for example, has written down the value of its monoline insurance guarantees by 61 per cent already. Still, expect further, mid-range writedowns. And look to UBS, Citi and Merrill for the worst of it.

In a more general sense, there may be a freezing up of even more money through regulatory capital requirements. The world’s bond market, as of last night, is suddenly a lot less triple A.

Whither Ambac and MBIA? Both are displaying remarkable alacrity. Out of the tangled web of trusts, limited partnerships and SPACs that make up Ambac, the once defunct Connie Lee is being ressurected, weed-like phoenix-like, as potential triple A spin off material. Word is going around that MBIA’s holding company might do the same and pump what spare capital it has into a new, smaller enterprise.

Moody’s, meanwhile, are looking pretty lame. Downgrade already.

Related links
MBIA, Ambac, $1 Trillion of Debt, Lose S&P AAA Rating - Bloomberg
Who is exposed to the bond insurer downgrade? - Dealbreaker