Ambac, MBIA: The Shorting Game is Over

Some facts that "experts" miss and shorters should know: Ambac (ABK) and MBIA (MBI) insured bonds have never in their history traded equal to natural triple A bonds. They always traded at double A levels, in both the tax exempt and taxable markets. Ask any trader. The holding companies have never been rated triple A.

The stress case scenarios that the rating agencies use are in fact depression (1930s style) scenarios. Simple put, at any point in time, a triple A financial guaranty insurer must have minimum capital equal to 100% of depression losses at a 99.9% probability with an extra 20-30% capital cushion thrown in for good measure. No one who understands the business has ever suggested that the insurer would necessarily maintain a triple A rating during or after a depression.

Credit ratings are simply an informed opinion as to the likelihood of getting paid in full on time in a very stressed environment, with triple As the most likely survivors. Read the rating agency credit rating definitions, and then read the raters' rating methodologies for financial guarantee insurers. Default assumptions for categories of risk can change, but the fundamental approach has remained the same for more than 30 years.

The unprecedented speed and magnitude of home price declines in certain housing markets is a natural result of the unprecedented speed and magnitude of the immediately preceding price appreciation that was fueled, in large part, by the collapse of mortgage under-writing standards beginning in 2004. Those depreciating markets are well on their way to reaching price levels consistent with current personal income levels, which has been, and always will be, the fundamental driver of residential real estate values.

There will be blood, but the patient will recover faster than many think; unless we have a depression, in which case I would rather be holding Ambac or MBIA insured debt than uninsured A rated debt. Is that not the fundamental reason why investors have been giving up a little yield in exchange for insurance protection during the last 34 years?

Disclosure: The author, now retired, was employed by Ambac from 1982 to 2000.

Comments

[skullchemist:]

great article. . . i've been sick of every ackman-phile posting anti-mbia ambac material on this site. . . there is a reason why whitman, pincus, and davis have all invested heavily in this area . . .

2008 Mar 02 08:04 AM

[CAK:]

Hi Carl,

Thanks for the post and good luck with your new blog. It's always interesting to get some perspective from the "inside", so to speak.
Hopefully, you will continue to shed light on what is happening
throughout the sector and perhaps answer questions that may
arise from time to time.

2008 Mar 02 12:42 PM

[Gary McCamey:]

[comment deleted for abusive language, misinformation and racism]

2008 Mar 02 05:58 PM

[Igor The Great:]

Carl,

Thank you very much for bringing some sanity to the matter!

Captain Gary,

Great comment! I am with you bro!

2008 Mar 02 09:32 PM

[CAK:]

Cap'n G & 34634 -

"In religion and politics people's beliefs and convictions are in almost every case gotten at second-hand, and without examination, from authorities who have not themselves examined the questions at issue but have taken them at second-hand from other non-examiners, whose opinions about them were not worth a brass farthing.
Mark Twain

2008 Mar 02 10:46 PM

[Kurtis:]

It's not MBIA insured bonds that are in trouble. They will survive unscathed. It's the HOLDING COMPANY MBI that everyone buys stock in that will disappear. The holding company has a balance sheet it's own CEO wouldn't sign off on because of the many undetonated bombs waiting to go off, isn't signing up any new business, has at least three stockholder lawsuits against it, an EPS of -$15.00 a share and growing, and no dividend. Even IF the bonds it insures are rated AAA, the holding company MBI is a train wreck and will sink to penny stock status. As soon as "investors" wake up and stop throwing their money away on it.

2008 Mar 03 05:40 AM

[OCPTH:]

Gary, a misinformed and hateful rant. So who's the "sky is falling" guy again? Because I think it's you.
Now as a reasonable person I'm not going to blame this economic downturn or correction entirely on our current administration. There are way to many factors that lead to situations such as this. However, i doubt that a few politicins expressing their opinions about whether or not this is a recession have much to do with it at all.

2008 Mar 03 04:52 PM

[gebby:]

captain gary is out to lunch. democrats would never have lifted the regulatory burden that the republicans have. the republicans put fnm and fre out of business and this is when the subprime fiasco started in 2004. really. we need regulatory oversight in financial markets to avoid this kind of debacle in the future. i am long abk at 8 and a bit worried.

2008 Mar 03 06:26 PM

[OCPTH:]

I'm long on ABK as well, but not with a whole lot of money. I think a safer bet is on the banks themselves. I like WM. I realize it's also a bit of a gamble, but something tells me they're gonna make it through. lol Don't mean to get all technical on you.

2008 Mar 03 06:46 PM

[ct_programmer:]

Capt. Gary, I think you should change your opening line from "I may be crazy" to just plain "I am crazy".

2008 Mar 05 10:55 AM