The market's problems, he said, hinge on mortgage insurers such as MBIA
(MBI), Ambac (ABK), PMI Group (PMI) and MGIC (MTG).
Cramer said those companies are in dire straits because they don't have the money to cover $500 billion worth of bank loans mired in the subprime mess.
These companies, Cramer warned, could go "belly up" in weeks, if not days. If that happens, he predicts, the banks could quickly run out of capital, and the Dow could plunge as much as 2,000 points.
I was looking at MBIA earlier to see what these company did and found this scary proposition. MBIA along with Ambac also insures $700 billion in municipal bonds. Ambac just got downgraded to AA because of liquidity concerns and MBIA may soon follow it. Ambac couldn't come up with $1 billion in equity funding (which is scary by itself) so they got downgraded.
If these guys go to junk or worse yet go bankrupt then municipalities may not be able to raise any further capital beyond their tax bases. So to make up for the shortfall they would have to raise taxes at a time when consumers are already squeezed. So Bush's $150 billion tax stimulus may get offset by your municipality raising your property taxes to make up for a budget shortfall. Also what is worse is they won't be able to borrow out of any shortfall that would be coming down the pike.
My guess is a sovereign wealth fun will come out of the woodwork and buy these companies out for pennies on the dollar and control bond insurance in the US for years to come. If you were afraid of the UAE buying our ports then you should really fear the Saudi's controlling the issuance of our municipal bonds.
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