MBIA, Ambac and GICs: The Other View

The Street takes exactly the opposite view of MBIA (MBI) credit default swaps as me.

One hedge fund manager also emailed me with the same possibility – that the GICs issued by MBIA (and MBIA) will impact parent company liquidity through cross default provisions.

Not so fast

With Ambac (ABK) it is easier. Here is a corporate structure of Ambac.

click to enlarge

The GICs are written by the a subsidiary of Ambac Capital Corporation – not by the parent. They are reinsured by the main reinsurance entity. After that they are guaranteed by Ambac Financial Group (the holding company).

If the GICs get called, Ambac has a simple option. Bankrupt Ambac Capital Corporation and pay out of the insurance company. It won’t touch the holding company liquidity provided that the holding company has not guaranteed Ambac Capital Corporation (which as far as I know, it has not).

I believe the same structure applies at MBIA. Indeed, this Moody's report notes that the GIC business is carried out by a separate subsidiary. If that is the case, then the WSJ is straight wrong. It’s a little harder for me to identify the relevant subs because I have not read the contractual terms of any GIC. If you have such documentation let me know.

Disclosure: Author holds long positions in ABK, MBI

Comments

[Ishortyou:]

In respect to AMBAC and MBIA: they need to keep and save all the cash including stop paying dividends, deleverage AGGRESSIVELY from all their risky liabilities specially those CDS-CDO's, RMBS-ABS of uncertain value to remediate their books in all of their subsidiaries, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations, dissipate doubts and prevent further downgrades from rating agencies. They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.

static.seekingalpha.co...
www.mbia.com/investor/...
www.mbia.com/investor/...

2008 Jul 11 06:12 AM

[Rawbhurt:]

Does anybody think AMBAC is going to go down?

2008 Jul 11 09:10 AM

[Ishortyou:]

their books speak for themselves, take a look, doenst seem likely, the rating agencies over did it now a lot of the finantials are paying the price including Fannie and Freddie, sad...those ratings agencies are now with a lot of blood in their hands.

www.thestreet.com/_yah...;cm_cat=FREE&c...

2008 Jul 11 09:26 AM

[Crocodilian:]

Fascinating, but here's the rub: finance is about belief. They're called "credit" markets for a good reason-- and Ambac now falls afoul of the charge that can't be answered "I don't believe you". Unlike a contrarian play in say a diamond mine which no one else believes in, a company which depends on credit cannot "convince the doubters" -- if they've grown strong, their doubt ends up impairing the business of the company. I may not believe your seismology, but if you find diamonds in your mine, I'll have to accept that. . . . mining companies are often speculations in that way, and people can live with it. What role in the market is there for a speculative insurance company?

2008 Jul 11 03:18 PM

[Ishortyou:]

well how about this? biz.yahoo.com/bw/08071...
doest it make you a believer now?
I would say yes!

2008 Jul 11 03:27 PM

[Crocodilian:]

Here's one more ABK puzzle: one of their largest and most outspoken holders is part of Evercore, a well known LBO firm. If there were value in ABK that is not presently recognized in the market, one would have thought that an LBO shop with a big stake in ABK equity would have been able to find a cash buyer for the company . . . that hasn't happened though.

2008 Jul 11 04:31 PM

[Ishortyou:]

show the books my friend the books otherwise we are just speculating, the books speak for themselves.

2008 Jul 11 04:36 PM

[John Hempton:]

Crocodilan gave the reason why I think Ambac and MBIA might be worth speculation - but other companies are not.

A financial that loses the faith of the markets is usually dead. Witness Indy Mac. What happens there is that their funding disappears.

Ambac and MBIA are NOT FUNDED MODELS. Its a trivial point - but they have issued guarantees. If the market loses faith - so what. Put them in runoff.

If it turns out well then all is well.

But with Indy Mac the market lost faith and the government (aka FDIC) stepped in.

Crocodilian misses point. These do not require faith of the market. If anything faith of the market is a BAD THING because they can buy back some CDS issued at a discount...

J

2008 Jul 11 08:26 PM