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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

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