Ambac Does It Again

I apologize if I seem defensive or full of myself, but often when I strike out with a contrarian opinion, I get a lot of negative feedback. It often causes me to view things defensively. Case in point - Ambac. When I first released my analysis on this company, I said:

Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion equity base.

I came to this conclusion after a detailed analysis of Ambac's portfolio (at least what Ambac has made public, which was sufficient) covering exposure in the Structured Finance, Sub-prime RMBS and the Consumer Finance business. Ambac's management was forthcoming enough to publish a portion of their insured portfolio which allowed me to review each structure.

I am short Ambac and MBIA (for whom I have also released research), so be aware of my position as I present this opinion. I profit not necessarily from whether ABK can continue as an ongoing concern (which is in doubt and wouldn't hurt my shorts to say the least), nor from an infusion of capital (whether it be debt or equity, either of which would be a poor investment from my perspective) but from the significant decline in value of the existing shares in which I have taken a bearish position. To determine my short position, I calculated relative nominal book valuations, actual economic book valuations and produced standard financial forecasts. Of interest is the loss tail analysis wherein I have estimated the present value of the future losses.

Stating this company would suffer $8 billion of losses and was effectively insolvent was met with derision, skepticism and other adjectives which I won't mention. Even the reader rating system showed a poor reception (I am aware that my writing style irks some, but hey - that's who I am). I received a lot of requests for substantiation of my assumptions, hence I released more info (remember, this is not a paid service and I am not an analyst - I am a private investor). I first took a bearish position on Ambac and MBIA in the $60 to $80 range. I published the research while they were in the mid $20 to $40 dollar range.

Well, they are $5 and $11 respectively, and I expect them to fall further and eventually go out of business. It appears to me that Ambac is still effectively insolvent after their latest press release which shows a very big loss on operating earnings as well as the massive loss in net earnings which includes the mark to market controversial writedowns. If you read through the insurance section of the blog, you will see that I have written extensively on this top and these companies. Thier entire business model is moot. They are trying to underprice the market on risk, and no arbitrage trade works consistently forever since even if there was an inconsistency in pricing that these companies found, it would be compensated for over time by the market. Basically, there is no free lunch.

Interestingly enough, the Bear Stearns analysis received some derision in the other places it was published as well. I wonder... I believe that there are several other well known financial services companies that are effectively insolvent and will meet an ignominious end. Many of the negative comments I recieved stemmed from two major camps:

1. The first was the "Our business is to complex and complicated for you, and outsider, to understand".
2. The other camp was the "Look at all of these big, smart name brand investors who invested contrary to your opinion. You have no idea what you are talking about because we've never even heard of you"

My responses to these were:

1. If the business model is too complex for the average financial guy to understand, its probably too complex period. In addition, I did understand it - it was just a bad business model.
2. I actually dedicated an entire post to the name brand thing. Big hedge funds, billionaire investors, and well known private equity funds have all contributed to my trading profits thanks to their buying into the companies that I have shorted, driving the price way above what it should be and allowing me to profitably short some more. See the post for those who are hooked on name brand investors.

I can go on, after all the folly of this company being rated AAA by 2 of the 3 major ratings agencies is a joke (see my cartoons), then their is the systemic CDS risk they pose to the rest of the financial system. These guys are going to cause a CDS domino effect that nobody is going to want to see. Even those short the CDS will not get paid when the other side of the deal can't pay up. How do we know who can pay up and who can't? We don't know because of the non-existent credit risk management that is in place. I urge you to revisit who's holding the $119 billion bag? Then there is the issue of nobody wanting to do business with these companies in the first place, forcing this "AAA" rated company into runoff. Honestly, read through this earnings announcement and consider that Moody's and S&P just reaffirmed its AAA status!

Well, let's see how Ambac has done this past quarter:

From Bloomberg:

Ambac Financial Group Inc., the bond insurer that lost 93 percent of its stock market value in the past year, posted a wider loss than analysts estimated after $3.1 billion in charges for subprime-mortgage securities.

The first-quarter net loss was $1.66 billion, or $11.69 a share, New York-based Ambac said today in a statement. The company's operating loss of $6.93 a share was more than three times the $1.82 estimated by six analysts surveyed by Bloomberg.

Disclosure: Short Ambac and MBIA

Comments

[venividivici]

I am totally in agreement with you Reggie. I have spent the last five years trading shares as my only job and I have made enough money not to have to work again. But I stopped investing in August because of what I saw as the total lack of credibility in the American financial system and the effect that would have on the whole world's financial system. And things have got infinitely worse since then.
AMBAC is a classic example. The shenanigans that have gone on in that company are breathtaking. How can you explain why all of these so called super smart super rich people are pouring their money into a company like AMBAC. The only explanation that I can come up with is that keeping AMBAC afloat is part of the larger mission to keep the SS Titanic from going under.
Please keep on writing Reggie.

[Melancholy Korean]

Just started visiting this site, so I can't speak to your previous pieces or the reaction to them, and as a former options trader I'm not that well-versed in financial analysis so maybe I'm missing something, but I liked the post. As a writer myself, I have no idea why people would find your writing style irksome. (You don't use words like "irregardless,&qu... do you?) I found your style perfectly enjoyable.

Keep sticking to your guns and don't let the slobbering masses get you down.

[apppro]

More “I told you so’s” from a short selling basher. I wonder what you will say when these write-downs become write-ups?
I just have 2 questions for you:
1. Exactly where has all these catastrophic foreclosures occurred to warrant 90% write-downs from the financials? Answer: no place. Foreclosure rate still at around 8% Nationwide.
2. BUT more importantly I want you to ask yourself: Exactly what did your negativity and loathing create out of this financial fiasco? Confidence is a delicate item and most of our economy is based on it and people like you have done more damage to it and us then 9/11.

Just shut up and go away!

[Rabbito]

I hope our economy is based on real things and not an attitude like confidence.

Thanks for your posts. I made a nice profit shorting MBI. If I had listened to people like this guy "Apppro" and others like Kudlow, I would have lost money.

Just keep speaking and dont go away!!

[drmalaka]

How does a company trading at $4 lose almost $12 a share? How funny is that? And then guys like appro think it is Reggie sending these stocks down because he is nagative. Hard to believe some guy who writes occassional articles had anything to do with a $12 a share loss.

I was laughing with some friends the other day that I bought some MBI puts becuase the sector had been quite for several weeks so when the chatter started again it would be more bad news.

Remember the first ABK bailout rumor in Feb where the stock ran from $9 to $12 in the last half hour of trading? Wonder how those permabulls like apppro did if they bought on that great news?

[fxtrader07]

He Reggie, you do yourself and your credibilizy a huge disfavour with statements such as:

"Thier entire business model is moot. They are trying to underprice the market on risk, and no arbitrage trade works consistently forever since even if there was an inconsistency in pricing that these companies found, it would be compensated for over time by the market. Basically, there is no free lunch. "

Please, give me a break! Of course, there is no free lunch. But that's not what bond insurance (or any insurance for that matter) is all about. bond insurance is a decade long proven and quite profitable business model. (Warren Buffet had not started a bond insurance company recently if it weren't a viable business model, no?) That MBI and ABK got into trouble was actually ONLY because of their greed and underestimation of CDO related risks. So once this is cleaned out, you WILL have bond insurers again/Still and you will have demand.
What you are doing here is talking your book with phony and inaccurate claims.

[Reggie Middleton]

FXtrader, you are being contradictory. Either its proven or its a decade long. It can't be both, particularly in insurance where some risk and loss tails can actually be ten years or more. Buffet's own president of BHAC says the bond insurance industry's future looks shaky. Bond insurance is based on taking advantage of an incongruity of rating corporate and muni debt, and incongruity that is now being corrected.

Buffet who now owns a bond insurer even stated that you can get into a lot of trouble charging 50 points (usig leverage) that the market charges 100 points for. That is actually common sense.

Since my job is an investor and not a reporter, academic or professional blogger, the only thing that really does my credibility disfavor is negative or minimum alpha over an extended period. I thank the powers that be -thus far I seem rather credible.

[Ames Tiedeman]

What a nightmare. How these companies managed themselves into hell is just obscene. Managers and CEO's need to be seriously spanked. Is this the best Harvard can produce?

[fxtrader07]

Hi reggie, you are splitting hairs in order to get around the major point. the business is older than a decade and it has been proven to be sound and viable. if it were only about short-lived incongruity Buffet would not have started the company, right?
of course , as in any insurance business, prudent underwriting holds the key to long term success and survival of the insurer and it may not be easy to do that. But "difficult" does not equal "impossible"... And your quotations from Buffet and BHAC certainly do not invalidate my point, but rather underpin it.
Apart from that, investment success and credibility are two different pairs of shoes.

[turning point]

I just bought Ambac on the way down and will make a kill
on their way up. Thinking they will go down with a USD 528 bn
portfolio is pure stupidity, book your profit Reggis, well done,
but go learn the alfabet.