A City I am intimately familiar with recently took out tens of millions of dollars in municipal bonds that they probably won’t be able to pay back (entering assumptions were builder fees from sustained growth when the new reality is zero and plummeting home prices and resulting tax revenues).

MBIA and Ambac insure bonds like this and are having their credit rating cut by Moody’s because of the reality on the ground. Both companies have lost nearly 90% of their stock value in the past year. If MBIA and Ambac go under the City’s municipal bonds, like a gazillion others, will be worth pennies on the dollar. Banks hold many of these bonds and don’t want to see the value of their portfolios drop.

So rumor is that the banks will invest $3 billion in Ambac, and it’s stock price rose 16% today. But it’s all a house of cards.

The City won’t be able to make its payments in 2008-dollars. Which leads to the next posting.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aj5fqH8i34mg&refer=home