Ambac's Collateral Losses Mean No Guarantee Business

Shares of Ambac plunged over 40% to an intraday low of $3.08 as Lawyers Scrutinize Contracts On 17 Transactions.

Bond insurer Ambac Financial Group Inc. (ABK) has hired legal and forensic experts to examine 17 of its financial guarantee transactions covering residential mortgage-backed securities as performance deteriorates.

During its first quarter earnings conference call Wednesday, David Wallis, Ambac's chief risk officer, said the company is examining transactions that have performed much worse than expected.Wallis suggested that one prime candidate for legal scrutiny is a deal with Bear Stearns Co. (BSC) it closed in April 2007. Another is a transaction with First Franklin.

Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral, a transaction that has seen an unexpectedly " rapid escalation of losses," and represents an outsized percentage of the insurer's expected credit impairment, Wallis said.

No Surprise In This Corner

Hello Moody's, Fitch, and the S&P this is your morning wakeup call.

A stock falls from $90 to $3 and the entire way the rating agencies keep on pretending it deserves an AAA or AA rating.

Credit Default Swaps Soar

Default risk premiums soar on bond insurers.

Credit-default swaps tied to the insurance units at Ambac and MBIA Inc. soared, suggesting investors are losing confidence in the ability of the companies to meet their obligations after bad bets on mortgage securities led to $3.1 billion in charges at Ambac.

The earnings report from New York-based Ambac also raised fresh concern that the world's two biggest bond insurers may face crippling ratings downgrades that would cast doubt on $1.2 trillion in securities they guarantee.

"They should have been cut and they weren't cut last fall, and that's part of the problem we see playing out here," Joseph Mason, an associate professor of finance at Drexel University in Philadelphia, said today in a Bloomberg Television interview.

My Comment: Last Fall? Hell, they never should have been rated AAA in the first place. At a bare minimum they should have been downgraded when all the housing trouble appeared in 2006.

Ambac reported a first-quarter net loss of $1.66 billion, or $11.69 a share. Its operating loss of $6.93 a share was larger than the $1.82 estimated by six analysts surveyed by Bloomberg News.

My Comment: Since when do AAA rated companies lose $11.69 per share?

Ambac interim Chief Executive Officer Michael Callen tried to calm investors, saying "the worst may be behind us." He also said the company won't file for bankruptcy.

My Comment: Since when does anyone believe anything that CEO Callen says?

Let's take a look at "the worst is behind us" in graphical form.



click on chart for sharper image

Ambac fell from $94 to $3. On that basis 97% of the move in Ambac is indeed behind it. There is only 3% left to go.

Does anyone think Ambac's guarantee is worth anything? Who?

The disclosure guarantees one thing: Ambac is not going to get much if any guarantee business. And a guarantee business that does not get guarantee business is guaranteed to go bankrupt. It's as simple as that.

Comments

[dectra]

The interesting question is Who's been shorting Ambac?

[buyitcheap]

Ready your cash to buy the munis of all of these towns that are going to see the VRDOs soar in yield this week and next. You may get 10-15% state and fed tax free, for the better part of year!

[Trumpace]

Actually I think what Ambac did is what needs to be done to start the recovery. Now if only the Banks and Housing would do the same, we could start the healing process. No more government bail outs, let the markets work things out for themselves, afterall isn't that really what a free market system is all about.

[fxtrader07]

since when are losses per share a criterion for AAA ?? As a side note,do you want to comment on the USA's triple A rating? Or on any AAA ratiing then, for that matter?
phases of losses are normal for almost every business, especiall in the insurance arena. A hurricane or two can make for a huge swing to losses for any insurer, yet for that prupose they build reserves. essentially you will always have a lot of years with small or mid-sized profits, some years with slight losses and here and then a year with huge losses. If, taken all together, the company stays profitable overall, there is ZERO need to rethink a rating.
Even more silly is the notion to link stock price performance to credit ratings. It is so stupid and hillarious, it's breathtaking. perhaps, you should not only focus on ackman and his squad but read people like whitman who, contrary to me, to you and to ackman KNOWS the business of ABK pretty well