Ambac's Announcement is a Joke; Disagreeing with Whitman on Monolines

I had to check my calendar to make sure it wasn't April Fool's Day because this Ambac (ABK) announcement is a joke. After weeks of rumors that smacked of blatant market manipulation, Ambac is back to exactly where it started: no deal with the banks (other than some vagueness about backstoping the offering -- but there's no firm commitment that I can see, nor, critically, a backstop price -- sort of important when we're talking about 50% dilution!), no split into two parts, nothing! So what do Moody's and S&P do? I don't even need to tell you... (though they'll keep Ambac's outlook negative). Here's a summary from the WSJ:

Ambac's Anticlimax
By ROBIN MORONEY, WSJ

Ambac's long-awaited bailout plan disappointed the market, but that doesn't necessarily mean the move will fail to keep the bond insurer intact.

Ambac, the nation's second-largest bond insurer, announced this afternoon it would try to sell $1 billion in common stock and $500 million worth of equity units -- notes that must be converted to common stock in May 2011. The extra money is designed to help Ambac preserve for its main operating unit the top-notch triple-A ratings from Moody's and Standard & Poor's that it needs to stay competitive. Debt-rating agency Fitch has already downgraded Ambac, which has been buffeted by the credit crunch. Ambac already announced it would cut its dividend and stop writing policies for certain kinds of complex debt securities for the next six months. In today's prospectus for the offering, Ambac also said that if Moody's and S&P join Fitch in downgrading it, it has a backup "reduced business plan" for getting by on a AA rating. Investors have been anxious about Ambac amid worries that bond insurers won't be able to cover their losses from the mortgage crisis and will in the process drag down other kinds of debt they insure. After today's announcement, Ambac's shares sank, finishing the day off 19% at $8.70.

So, why the disappointment? To begin with, many had hoped that the extra capital would come from banks, not from hypothetical investors willing to buy the stock. Ambac also seems to have rejected, for now, a plan that it and other troubled bond insurers have been considering: splitting up into a unit that deals with relatively risk-free municipal-bond business and others dealing with more troubled financial instruments. Such a split would allow the "good" part of Ambac's business to pursue its business without being weighed down by the problems of the "bad" parts, but such a move is considered financially and legally messy. Finally, Ambac may need more than an extra $1.5 billion to consider itself safe. After the announcement, Fitch said the amount wouldn't be enough to get Ambac's rating back to AAA. The other two major ratings agencies, on the other hand, said that the share offering could be enough to keep Ambac intact, assuming that it goes as planned.

If you want to read the bull case for MBIA, embedded below is an excerpt from Marty Whitman's latest quarterly letter to investors in which he explains why he bought $326 million of MBIA's stock and surplus notes since December and attacks Bill Ackman (and, indirectly, me, since I'm no doubt part of the "bear raid") -- here's the key part:

MBIA is being victimized by an apparently well organized bear raid headed by William Ackman ("Ackman") of Pershing Square Capital Management. While the bear raiders have been helpful to Third Avenue, in making it easier to acquire MBIA Common at depressed prices, the bear raiders might have the ability to adversely affect the going concern attributes of MBIA, given the possible capriciousness of Rating Agencies and regulators.

It's a very weird feeling reading something written by someone I have so much respect for, with which I disagree so vehemently. In the near future, I will share a Powerpoint presentation that I've been working on for a couple of weeks in which I lay out exactly why we think MBIA is a zero. From a Reuters article about Whitman:

The credit crisis that has crushed the share price of bond insurers has not fazed Marty Whitman, regarded as one of Wall Street's savviest investors, who boosted his stakes in the sector through January.

Whitman also belittled New York efforts to bail out the battered bond insurers, saying they did not need such help. And in effect he put his reputation up against William Ackman, a hedge fund manager whose big bets on share price plunges in the industry have received wide media attention.

Disclosure: Author's fund is short ABK and MBI

Read this doc on Scribd: Excerpt from Third Avenue Funds Q1 08 ltr

Comments

[ErichRiesenberg]

This is quite a contrast, with Whitman recently buying into Ambac, MBIA, home builders and mortgage insurers. Investors disagree all the time, but it is interesting to see successful, fundamental value investors disagree so starkly.

One thing I am curious about is why those short MBIA and Ambac don't cover and sit it out, with the stocks down 70 - 90%. I realize if they go to zero it is still theoretically a 100% gain from here, but with so much desire to prop them up and holding and opportunity costs it seems like so much has already been made. If any financial companies are "too important" to fail, these seem to fit the bill.

Another problem for owners of Ambac specifically, Whitman apparently thinks they have value even in case of runoff, but with common stock dilution at these levels that value, if it exists, is being diluted.

[Pj568]

Another dilemma? If Directors believe the run off value is greater than current market prices, would they not be breeching their fiduciary duty to shareholders by approving plans to " issue new equity" with a significant dilutive effect for any reason other to avoid bankruptcy?

[JohnnyBitchdog]

couple of comments:

Whitman's letter is full of self-serving delusions, but if you read between the lines, he does offer up a clue as to where this will really blow up:

20 billion in Second Mortgages and HELOCs......these deals don't have the seniority protection that much of the rest of the book does......not too difficult to see a few billion in losses there alone....and Whitman does at least make a glossing over of the risk there.

With respect to the Riesenberg comment about too important to fail, I have to strongly disagree. The only way something is too big to fail is if they have an important role going forward after the crisis is over. To me, it's clear there is no need for MBIA after the crisis is over and it may well be better for the system if they weren't there.....others, including Buffet, have been fast-tracked to the winners circle.......

Any rescue at this point would simply be based on moving losses around, not avoiding them........and the banks simply can't afford to be the receivers of any more losses. A government bailout might work in the short run, but that would rightly scare the hell out of the entire investing world.

Ergo - let them runoff. if it's not deadly after the crisis has stabilized for a year or so, and there is sufficient capital to cover future claims and run a risk taking business....fine.

But there is no reason to think keeping MBIA alive benefits the system at this point.

jbd.

[Vegasjoe]

Whitney is right on; Whitman has lost his marbles, and ought to retire. Buffett is laughing all the way to the bank; and I suppose, so is Wilber Ross, soon, if not now. Banks have little or no capital left to do anything with any risk; Why great value investors would try to resusitate a dead carcus in the desert is beyond me!

[Chief DebtOfficer]

I'm just curious why those banks agreed to such a stupid idea while they must be sure Ambac wouldn't keep AAA. My guess is that there would be an intervention by the government to rescue those banks (not Ambac) so that those banks don't need Ambac any more...

[helplessobserver]

Ah, yes the home equity and second mortgages loans are in the wilderness and naked. Some lenders have even quit trying to collect on these loans.

[lulz]

Mr Tilson, why did you provide link to a Reuters article with regurgitated news, but not to the original letter?

Here is a link to entire Whitman's letter, MBI discussion is on pages 3 to 6:
www.thirdavenuefunds.c...

[CAK]

WT is spot on about the inevitability of serious Federal intervention in the wake of what will end up being a cataclysmic economic event for this country. Just as FDR counterbalanced 3 years of flawed policy between 29 and 32 with tens of thousands of new government regulations so we will see that pattern repeated beginning a year from now. New rules and oversight, especially directed towards Wall St. banks & brokerages, will be nothing less than staggering. There won't be a trader, speculator, investor, banker, broker, hedger punching a trade for one share or a million without the hot breath of the US Government breathing down their neck. Truth is, when the economy gets wrecked someone's got to take the fall. And the fall guy is Wall St.

So, forget (or enjoy) what you have now because it will all be gone 3 years from now. And then, when you've reached the point where you think our Federal Government can't possibly hamstring things anymore, can't question or watch every single share of stock you buy or sell, well then you've reached the...2nd or 3rd inning. Because there's going to be a whole lot more.

Congressman Kanjorski can't say Wall St in the same sentence without using the word "greed". And that is the last thing you want to hear from a homespun hero in Washington. Hell, The Feds will be storming past Trinity Church like Stormtroopers under the Arch d' Triumph.


Tumbleweeds swirled at the corner of Wall & Broad for 25 years. It may seem quiet now but the winds are beginning to blow.

[beachtango]

Tillson you're amazing...Get a clue, and do yourself a favor and cover your shorts...short interest is not what it was...Perhaps you need to review everything before you start posting. Please read on :


NEW YORK, March 11 (Reuters) - U.S. bond insurers' losses are likely much lower than what the troubled firms have reported when marking their holdings to market prices, Moody's Investors Service said on Tuesday.

Shares of bond insurers like MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research), which guarantee payments on roughly $2.4 trillion of debt securities, have fallen precipitously on worries about billions of dollars of claims on mortgage-related bonds they may have to pay out.

In the last six months, Ambac shares have fallen 79.4 percent and MBIA shares have slid 81 percent.

But Moody's approach to rating the guarantors involves trying to determine the "real economic loss" the firms will sustain, as opposed to mark-to-market losses, Moody's analyst Ted Collins said in response to a question on a conference call.

Such loss estimates are "lower than the mark to market that's being recorded," Collins said.

Accounting firms are putting increasing pressure on financial firms to mark their holdings to observable market prices. That has frustrated some firms, which argue that volatile short-term prices can exaggerate actual losses.

If the losses the bond insurers face turn out to be less than expected, that could provide some relief for investors.

Insurers like Ambac have had to write down the value of billions of dollars of credit derivatives, but these write-downs may not necessarily translate into actual losses.

As a result, some players are still confident the firms have enough capital and available funds to pay expected claims.

once again shorts sellers , don't get caughts with your shorts down.. Satrt covering them while you can, and stop the cynicism.

[CAK]

When I brought up the brutality of forthcoming regulation my time frame was 4 YEARS, not 4 DAYS! If you are in the business, be it broker, banker, mortgage lender, well you had better get used to going to work wearing shoes and nothing else. The Feds are getting ready to shred open the books. Talk about hedge fund regulation. Let's not, because what we are going to witness is going to bring
tears (and fears) to a whole lot of folks.

[CAK]

Just one more note - The irony of leadership, or lack thereof, and the havoc that leadership will wreak on the financial svcs industry is that it's coming from Barney Frank, not Bush. And that should have a lot of people sweating, considering the unbelievable rhetoric coming out of Congess right now.