Mish on the ratings agencies reaffirming AAA ratings for Ambac and MBIA

In a widely expected move, the S&P proved they have an iron stomach for gall and/or a nose that cannot distinguish horse hockey from a rose. Today the S&P Affirmed The AAA Rating Of Insurers MBIA, Ambac Ratings.

Standard & Poor's reaffirmed the Triple A rating on the two biggest bond insurers, MBIA and Ambac Financial Group, sparking a rally by both stocks and the market in general. S&P ended its downgrade review for MBIA's (MBI) Triple A rating, citing success by the largest U.S. bond insurer in raising new capital.

The action reflects the company's ability to successfully access $2.6 billion in extra capital that can be used to pay claims, S&P said in a statement. The outlook is negative, indicating a rating cut may still be likely over the next two years.

The "AAA" ratings of Ambac (ABK) were affirmed but remain on review for downgrade. A group of banks has largely finalized a deal to recapitalize Ambac and is now trying to sell the plan to the rating agencies to save Ambac's triple-A rating, CNBC has learned.

S&P's affirming of Ambac doesn't take into account the recapitalization plan, but the review will continue until details of the plan are clearer.

A tentative structure for up to $3 billion in capital for Ambac has been agreed to by the consortium, which includes Citigroup (C)and Wachovia (WB). The banks are trying to save Ambac, as well as other bond insurers, because a ratings downgrade could force the banks to write down billions more of their own debt.

Citing ability to raise $3 billion in capital (a deal that is not even finalized), and in the face of monolines holding $70-$150 billion of worthless CDOs, the S&P held its nose and confirmed horse hockey smells like a rose.

~ Mike "Mish" Shedlock, "S&P Sniffs Horse Hockey, Calls It a Rose," Mish's Global Economic Trend Analysis, February 25, 2008