After Ambac Downgrade: How Will Treasuries Fare?

| About: Ambac Financial (AMBC)

Ambac’s Q308 report was stunning in its awfulness. The monoline insurer certainly looks to be doing worse than its competitors like PMI Group (PMI) or MBIA (NYSE:MBI). From Ambac’s Q308 conference call (ABK):

On subprime and alt-A: 

We have chosen to raise our severity assumptions, now 55% to sub prime and 45% for Alt-A…  2006 sub prime cumulative loss for the Q6 underlying our high grade transactions, will be 19% on average whereas the Alt-A equivalent… is projected at 8%-13%.

For reference, the 19% sub prime assumption compares to around 8% for the exceptionally poor 2006 vintage and the present booked cumulative loss within the vintage of around 5%... These assumptions infer that around 40% of 2006 borrowers will default, a staggeringly high number. 

Second lien portfolio declines further: 

The second lien portfolio which comprises closed-end seconds and HELOC stands at about $15 billion… Ratings deterioration in the MBS book is driven by the second lien product which accounts for 70% of the ratings now below investment grade… HELOC claims in the quarter were $79 million, 42% of the company's total paid claims in the third quarter… At the end of the first quarter we had three high grade deals rated below investment grade. By the end of the second quarter 11, and now 15. 

Prescience: Ambac was downgraded Thursday, the stock fell 24%

If we were to be downgraded, we'll take an economic view of whether or not to terminate or to collateralize contracts based upon the terms of the liabilities, rates and the like and what type of posting requirements are required under those contracts. For example, long term fixed rate collateralizing with Treasuries would not be in our best interest. 

They sure hope to get TARP: 

Here at Ambac, we consider ourselves as imminently eligible and aligned to assist in the restoration of liquidity and stability to the financial system as per [TARP].