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 . . .

[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.

[Gary McCamey]

I may be crazy, but my personal feelings, especially after 63 years of watching the Democratic and Republican parties serve their parties better then they'd ever consider serving America. Some of you will call me an idiot, but I believe the whole problem with the economy is there is going to be a presidential election this year. Democrats are doing anything they can to hurt the economy, and I keep seeing President Bush do things to help, but these Democrats don't like it, continue crying 'The Sky is Falling', and I swear they're glad of any bad news that comes out. It goes back to what a man told me years ago, "If a jackass ran on the democratic ticket, I'd vote for it". I only this year found out the difference between the two parties. Liberals and conservatives. So, since the liberals have taken God out of the schools, and off everything they could, I suppose I'm a republican. But it depends on what the guy running is saying. A democrat looks first at the party, then the ones running, then what they stand for, so on. I say you're all unamerican. You are the Jane Fonda's of this era. Shame on you. I bet you were all in church today worshiping the God you have so proudly taken out of our schools. Well, Jane Fonda hated America. Anyone who'd rejoice in a bad economy just to get some ignorant liberal elected, well, you ought to be in Nam, or worse. All my life I've admired and loved the men who fought in WWII, and I have to say you don't know what is happening. On Dec. 21, 2012 something is going to happen to this world, and if it's the end, I suppose it's fitting someone like Bama, or Hillary run America. With Bama you get a first lady who doesn't care a flip about America. Gee, I'm chopping away here and no chips are flying. Unless these party people, (Demo. and Repub.), change you don't need to worry about the economy, and I guess I agree with what I think Rush Limbah says, (you know who I mean), you democrats are willing to elect a Moslim to run America, the friend of my enemy. Liberals are in tune with Satan, therefore Hillary is saying, move over God, what foolishness. Theres no way those two could ever get elected to the America I know. So by hurting the economy you democrats are just wasting your money. Keep it down though, what fools. I own my shares, thank goodness no margins. I'm just gonna hold and wait until you people decide to stop manipulating the market for your party. If one of those two win, Hillary or Bama, we're lost anyway. I asked God, "What can I do", and I know, nothing. When people are so blind that they let their lives be controlled by a party, and have booted out all the important things, like honor, honesty and love of God, then it's no use for me to write this. I suppose you liberals will worship the Moslim God as quickly as you would the only God, so maybe you'll like what's coming.

[Igor TheGreat]

Carl,

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

Captain Gary,

Great comment! I am with you bro!

[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

[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.

[OCPTH]

Gary, you might want to wipe your chin, there's quite a bit of shit stuck to it as a result of your misinformed and hateful rant. The fact that you actually believe that the reseting of the mayan calendar will be a significant event is a tell tale sign that your mental facalties and ability to reason leave much to be desired. So who's the "sky is falling" guy again? Because I think it's you. Holy shit my friend, holy shit.
In addition I find it to be incredibly amusing if not an intellectual emergency that you base any of your opinions on what a moron like rush limbuagh says. Everything that has led to the situation that we're in has been under YOUR PARTIES WATCH. nimrod. 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 polititions expressing their opinions about whether or not this is a recession have much to do with it at all. If bush didn't think he was partly responsible he wouldn't be as inclined to lie to the american people and say that this is not a serious problem.

"liberals are in tune with satan" lol shut the fuck up stupid.

[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.

[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.

[ct_programmer]

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