Will Muni Bond Market Embrace Connie Lee?

Ambac (ABK) has won approval from Wisconsin to create a new guarantee business called "Connie Lee". Bloomberg discusses the situation in Ambac, Using an Accounting Change, Posts Net Income.

Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after using an accounting change to record a $5.2 billion gain related to its debt securities.

Net income rose to $823.1 million, or $2.80 a share, from $173 million, or $1.67, a year earlier, New York-based Ambac said in a statement today. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share, compared with an average estimate for a loss of 61 cents from five analysts surveyed by Bloomberg.

...

Ambac and MBIA have been losing new business to Hamilton, Bermuda-based Assured Guaranty Ltd. and New York-based Financial Security Assurance Holdings Ltd. Ambac and MBIA had a combined market share of 3.2 percent in the first half of the year, down from 42.2 percent in the same period of 2007.

Ambac's credit enhancement production, a measure of new business, fell 95 percent in the second quarter to $19 million.

Wisconsin regulators are expected to approve Ambac's plan to create a new AAA rated municipal-bond insurer, the company said today. The business, which wouldn't underwrite the structured finance securities that led to Ambac's losses, "starts fresh with a clean balance sheet," Callen said in the statement.

The combined 3.2% market share of Ambac (ABK) and MBIA (MBI), in the first half of the year in conjunction with a 95% drop in new business at Ambac tells the story.

I fail to see how Connie Lee can possibly be rated AAA, but then again the rating agencies turned a blind eye to the realities of the guarantors for something like forever. And regardless of what the rating agencies say, winning business and trust is not going to be easy for Connie Lee.

Here is the reality of this mess: There is certainly no reason for the municipal bond market to embrace the Pig In A Poke known as Connie Lee. However, it might pay to wait and see if Paulson starts hawking this product. Right now anything is possible.

Addendum

"MC" Writes:

Connie Lee has been around for a long time as you can see from this bond dated 1993. They were bought by Ambac in the late 90's I believe and my best guess is that the only reason they are using this name again is that there has always been a little bit of separation as the Connie Lee name was never involved in the CDO business.

What is old is new again.

Comments

[Ishortyou:]

Greedy crooks in Banks and Broker firms wrapped subprime, alt-a, resetting ARMS, credit cards, bad loans, junk, etc. into structured finance vehicles i.e.: CDO-ABS-MBS-SIVs, they misled the market and bond insurers into these fraud and now everyone is paying the price! now the misleds have to clear up their books from that toxic waste! One strategy will be to SELL CDS on toxic wastefull junk at 'attractive prices' to buttom feeders this way they will get capital and delever from derivative liabilities on toxic waste.

2008 Aug 06 02:53 PM

[Skoodog:]

Ishortyou, hard to tell your position on ABK and MBI since you post the same nonsense on every article on every major financial blog. Earlier posts lend you to be long on ABK and MBI.

If what this "MC" says is true there's going to be a lot of money from the institutional investors flying towards Connie Lee/ABK to take advantage of cheap prices and momentum due to a resurgence in bonds - particularly munis with their tax benefits. ABK at $15? Smelling more like $30 now.

2008 Aug 06 03:52 PM

[Tom Armistead:]

Mish, your assessment of Connie Lee's prospects is long on negativity and short on facts.

Connie Lee will have 1 billion of capital - twice as much as the fair haired boy Warren Buffett needed to get the triple A rating. It will also have a staff of experienced underwriters.

Municipal bond insurance is a slow moving game, the policies go on for 30 years or more, sitting out a year won't hurt Ambac, their customers still remember them, Buffett's price gouging attitude has endeared him to nobody. FSA just got 300 million from it's parent: sounds like they're running short of capital.

Read in the WSJ the other day re ABK & MBI "There is the realization they are not going to zero." I see ABK at 1 X adjusted book value of 17.75, plus some part of the mark to market will be reversed.

2008 Aug 06 08:32 PM

[jswede:]

"Municipal bond insurance is a slow moving game, the policies go on for 30 years or more, sitting out a year won't hurt Ambac, ****their customers still remember them****"

yes they will. and will remember to not do business with them and the others.... going fwd, muni insurance will be left to the 5-10% of the muni market that actually needs it. they are all about done.

2008 Aug 06 10:41 PM