Ambac's Earnings: You Can't Make This Stuff Up 13 comments
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Reviewing these slides, there
are two big messages:
A) The default trend slides (5, 6, 8, 9, 12, etc.) show an
unfolding train wreck; and B) Reserves are still way too low.
Just look at slide 2: Ambac is reserving $636 million
on $5 billion of exposure to CES, $432 million on $11.4 billion of HELOCs, $200
million on $6.5 billion of mid-prime RMBSs and $16 million on $8.1 billion of
subprime RMBSs. I think the HELOC number is the most absurd: 3.8%
losses?!
Keep in mind that these are exposures to RMBSs themselves, not CDOs and CDO-squareds comprised of tranches of RMBSs. In our analysis (which was similar to the Open Source Model Pershing Sq. released -- see the last page of our presentation on the mortgage crisis), we had assumed minimal losses on the RMBSs -- and then Ambac confesssed last week to $1.3 billion of expected losses (note that they're not claiming these are mark-to-market losses that will be reversed).
To see how wrong Ambac's models were, check out pages 19 and 20, in which Ambac insured a second-lien RMBS deal with Bear Stearns in 4/07 and projected 10-12% losses, and now they're projecting collateral loss of 81.8%!!!
Pages 23-28 of the attached cover Ambac's $32 billion of exposure to CDOs. On page 28, they've finally admitted that they're going to get clobbered on the CDO-squareds (they've written them down 70% -- in reality, it will likely be 100%), but they've taken only 1.2% impairment on $26.5 billion of exposure on regular CDOs. This is a complete joke -- according to Ambac's internal ratings, $7 billion is already rated below investment grade (page 24)!
The Goldman analyst is starting to get in the right ballpark, estimating $11.8 billion in losses. How this leads to a need to only raise an additional $3.4 billion to maintain Ambac's (increasingly ludicrous) AAA rating is beyond me, but even this amount ain't gonna happen for a company with a $1.1 billion market cap today. He also continues to value MBIA and Ambac as ongoing entities, saying "We do not believe that a run-off valuation scenario is appropriate for either Ambac or MBIA, as both companies have recently raised capital to avert a ratings downgrade from triple-A (from Moody’s and S&P), and both companies continue to write new business (albeit at depressed levels relative to history). Still, we present our “run-off” valuation model below for reference (see Exhibit 5)."
But the clincher is this line: "We lower our estimates for Ambac to -$18.05 in 2008 (from +$0.95) and -$6.40 in 2009 (from +$0.90), but increase our 2010 estimate to +$2.10 (from $1.00). We lower our estimates for MBIA to -$21.75 in 2008 (from -$1.81) and -$8.50 in 2009 (from -$1.33), but increase our 2010 estimate to +$3.25 (from -$1.14)."
Wow, it's trading at 1x 2010 earnings -- what a buy! Ya just can't make this stuff up!
Disclosure: Author's fund is short ABK and MBIA
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This article has 13 comments:
Scribd needs to add a rotate feature to their viewer. That was totally annoying to read.
"Holding company cash approximately $158 million, this covers approximately 1.2 years of debt service, dividend payments and operating expenses for the holding company. And plans to dividend approximately $54 million per quarter from Ambac Assurance to the holding company, which would grow this cash position to approximately $238 million by year end. That is approximately 1.8 times the holding company’s annual cash needs. We feel very comfortable with our liquidity position at the holding company."
"Projected claim payments for the full year 2008 amounts to approximately $151 million and we expect to pay out only about 24 million related to CDO losses in 2008." (from the insurance sub, not the holding company)
(Disclosure - I have no position on either side)
There are always two sides to any story, and I believe this is no different. The informed reader is well-served to consider the alternate perspective, such as...
-- Mar. 3 '08 article "Whitman takes on Ackman over Bond Insurers"
-- Dec. 25 '07 article "Marty Whitman back bond insurers - says Ackman is wrong"
I'm not saying Pershing is entirely incorrect, but rather, in this matter, contemplation of alternate opinion is a worthwhile exercise.
www.housingwire.com/20.../
Basically, lots of fraud. Ambac got ripped off by Bear Stears and some other investment banks, as well as the credit rating agencies.
But, if Ambac actually manages to save itself by proving fraud on the part of Bear Stearns/Moody's/etc (which seems highly possible), that would be an interesting outcome!