As Peter Madigan writes, Ambac and MBIA have finally joined peers ACA, FGIC and SCA, and succumbed to a downgrade by the rating agencies.

I'm sure I needn't go over the story of the monolines one more time; it's no doubt something regular readers of Risk will be thoroughly familiar with by now. Since it began with the onset of the subprime crisis last year, the monoline story has touched a wealth of asset classes -- from municipal credit, to inflation, and even life insurance securitisation.

It's also been keeping the lawyers busy, although perhaps fewer from today: Merrill Lynch has reportedly won a summary judgement from a US federal judge over SCA's failure to pay guarantees covering $3.1 billion of collateralised debt obligation (CDO) tranches. SCA's subsidiary, XL Capital Assurance, had argued the bank failed to honour a commitment giving it exclusive control rights over the tranches of CDO notes it insured -- making its guarantees null and void. More background on the story here.

Among the reasons it downgraded Ambac and MBIA, S&P notes "diminished public finance and structured finance new business flow". An interesting counterpoint came up while I was thumbing through yesterday's FT, in a letter from Jeremy Hosking, of Marathon Asset Management:

The inference that the bond insurance firms are not "going concerns" or that a Triple A rating is a business requirement for sales seems to ignore the abundant number of companies which do not innovate but remain in business, or which remain solvent despite lower tiered credit ratings. The negative comment should be limited to the suggestion that the option of writing new business has been temporarily lost; after all, a company such as MBIA cannot sell a Triple A rating that it does not possess.

However, the business value of a bond insurer consists of two components, not one: the aggregate of the existing book of business plus the option value of the new business opportunity. MBIA will remain in business for many years in order to stand behind its existing guarantees, if and when they are triggered. We believe the net present value represented by this book of business substantially exceeds MBIA's market capitalisation and that, unlike many banks, there is no requirement on MBIA to issue additional equity capital based on regulatory rules, rating agency opinions and unproven mark-to-market security values.

Mr. Hosking has his own reasons to be sanguine about MBIA's prospects, of course.

For more questioning of mark-to-market accounting, see here.

Mark Pengelly is blogging while Alexander Campbell is away.