Thoughts on Ambac Bailout, MBIA, Berkshire's Muni Bond Backing

The latest rumor about a bailout (I'll believe it when I see it), not only moved Ambac (ABK) from down 10% to up 16% in minutes, but also took the entire market up with it Friday. This "news" came out minutes before the close on a day that was looking very ugly. Coincidence? You decide... And people accuse the shorts of stock/market manipulation!!!

A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.

The money from the banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.

Ambac is also considering raising fresh equity from shareholders. It is not clear how much capital it will need, or what credit ratings the split businesses would have.

Note that this deal depends on a good bank/bad bank structure (of course the banks, shareholders and others are willing to put money into the good bank), which is by no means certain to be approved -- and if it is, it's more likely to be along the lines of Ackman's proposal.

• • •

So Moody's just came out with a new rating for Channel Re, MBIA's captive offshore reinsurer that MBIA stuck with ten of billions of the very worst toxic CDO schlock over the past couple of years (vs. $930 million of capital). Channel Re is in such bad shape that the two companies that own a majority of Channel Re recently wrote down their investment to zero. So, guess what Moody's new rating is? Aa3 -- the 4th highest possible rating -- I kid you not! I thought I'd seen it all... We're really going to have to think hard about doubling our short position here because it's hard to think of better evidence that Moody's is hopelessly stupid or corrupt (probably both).

Moody's Investors Service on Friday cut its top "Aaa" ratings on Channel Reinsurance, which provides reinsurance of policies written by bond insurer MBIA Inc (MBI), due to its exposures to residential mortgage-backed debt.

• • •

Even the good bank might not be such a great business going forward, facing competition from Berkshire, which is quickly taking market share:

Berkshire Hathaway backs 112 muni bonds - Moody's Fri Feb 22, 2008 12:50pm EST

NEW YORK, Feb 22 (Reuters) - Berkshire Hathaway Inc.'s (BRK.A) debt insurer has backed 112 municipal bond issues in the last two days, a credit agency said on Friday, a development that shows just how fast the new unit is growing in a field where rivals are struggling.

"We have rated approximately 112 Berkshire Hathaway Assurance Corp-insured issues between yesterday and today," a spokesman for Moody's Investor Services said.

Disclosure: Short ABK, MBI and long BRK.A

Comments

[hogwasher:]

Talking his book.

2008 Feb 24 12:16 PM

[zbeachbumm:]

Talking his book poorly.

2008 Feb 24 02:30 PM

[patm1954:]

Thank you for the voice of reason in this sea of insanity. The last hour rally on the Ambac/MBIA news/non-news was pure manipulation in my opinion. Buffett is quietly taking over the bond business due to his stellar reputation for reasonableness and solid balance sheet. I wish I understood what kind of money is involved in 112 bond auctions in two days of business, but I am sure Buffett will make much more in the future and deserves to. Investors pay for this insurance to be compensated in case of failure of the municipality--and the profits deserve to go to someone who can back up the claims if necessary.

2008 Feb 24 02:52 PM

[Johnny Bitc...:]

I also scratched my head at the Moody's rating......

As corrupt as they probably are, it always pays to pay attention to the trend in the rating, but the actual rating itself seems arbitrary (or corrupt).....

jbd.

2008 Feb 24 03:34 PM

[Sebrock:]

Anyone working at Moody's or S&P on the monolines should have their CFA designations taken away.

2008 Feb 24 08:51 PM

[john haskell:]

every time someone tries to point out that the monolines are teetering, he has to put up with all this "talking your book" BS.

It's as if Churchill, after warning the British people about Hitler for 8 years, and after watching the Germans sweep across France, had to listen to the Chamberlain supporters moan, "yeah, but you are just talking your book."

Let someone explain to me how a reinsurer can simultaneously be rated Aa3 and have its equity be worthless. Until those are reconciled, I recommend that the "talking your book" fools keep silent.

2008 Feb 25 09:17 AM

[bondboy:]

Mr. Sullivan, stop whining!

As ABK and MBI stock prices declined 90%, the talking heads at CNBC trashed the monolines all the way down, repeatedly using such words as "insolvent" (Cramer) and "bankrupt" (Gasparino). Do you think someone assisted CNBC's thinking and profited in the process?

On friday morning , Gasparino reports that downgrades are imminent sending the stocks down another 10%.

On friday afternoon, Gasparino reports that an equity infusion for ABK is in the works, and the stocks rally.

To which incident of maipulation should we object?

2008 Feb 25 10:50 AM

[abcde_98:]

Disclosure: no position in ABK, MBI
But, I'd have to say there was/is an element of manipulation with a hint of a deal and a lot of weasel room / ambiguity that it would be somewhat difficult to dispute its plausibility.
The strange thing is: why should almost the whole market go up with a potential (or actual) capital solution to one existing, financially troubled, insurer? There are new market entrants such as Buffett and likely others, which can fill the void of coverage needed. Is finding a solution to this one company: (a) the panacea for the whole market? (b) putting more into the hands of the consumer to drive the economy?

Hardly think so, so go figure when technology companies and other seemingly less correlated industries suddenly rebound.

The credit market meltdown can be attributed to lack of risk exposure tracking/management and possibly some common sense. Spreads/premiums were decreasing to rather low levels. Many derivatives were/are involved. In contrast to an underlying security with derivatives, there is a winner and a loser. Too many persons on one side of the market. Oh, and of course, the underlying underwriters/insurers of the credit risk letting their underwriting discipline disappear. And how about that AIG which forgot to consider (and/or record) the credit risk quality of the underlying companies (vs just the quality of the securitized vehicle)? The "pump" is certainly on at AIG with the WSJ publishing multiple articles to defend the stock.

Is the credit situation an acute (very hard hitting, one time) event or is it a chronic (ongoing, still hard hitting though we may think it is a shock at the magnitude of the first round, future rounds are quite bad also) event?

More problems in the credit market in my opinion. It's also amazing how overseas markets rocket when there is a hint of a recovery in the US economy -- ya think it's fixed overnight? for every sector?

2008 Feb 25 10:58 AM

[beachtango:]

MBI announces in response to media and other inquiries concerning the "Ackman plan" presented to regulators and then widely disseminated last week by Mr. William Ackman, principal of Pershing Square Capital Management, the co today released a letter it sent on Friday, February 22 to the Honorable Eric Dinallo, Superintendent of the New York State Insurance Department and the Honorable Michael T. McRaith, Director of the Illinois Division of Insurance. "As we stated last week, we believe this proposal is simply a continuation of Mr. Ackman's campaign to profit from his short positions and credit default swaps in the bond insurance industry... Mr. Ackman has only two objectives: to impede the ability of companies who are trying to strengthen their financial resources to meet the needs of existing and future policyholders, and to further his own personal agenda and financial objectives. His calculated practice of using the media to broadcast his self-serving and misleading letters, reports and presentations is, we believe, clear evidence of his agenda. "At a time of critical importance in the financial guarantee industry, Eric Dinallo and the staff of the New York State Insurance Department and other regulators are working tirelessly to assist all financial guarantee companies to develop plans to meet the needs of all their constituencies... Assuring that these plans treat all policyholders on an equitable basis is an extraordinary challenge that requires thoughtful and careful evaluation. Mr. Ackman should let the officials charged with regulating the industry do their jobs instead of continuing a relentless media-driven campaign fueled only by personal financial gain."

2008 Feb 25 12:46 PM

[NOYBIZNIZ:]

Hey Whitney (or is it "mr_xx_reddy"),

Does Warren Buffet's ass taste better than Bill Ackman's?

2008 Feb 27 02:33 PM