weiwentg

Ambac’s CDO Woes

It would seem to me that "collapse" should be defined as the loss of ability to pay claims. that has not YET happened over the last 15 months. they maintained an AAA rating for quite some time, meaning that they (according to our friends at S&P and Moodys) had the ability to pay just about any claim. they've been downgraded, but they still should have the ability to pay most claims.

It's still highly uncertain how much they'll have to pay. If they don't end up paying much, and/or the credit crisis passes relatively fast, then shareholders should make out well. If they pay out a lot, and then are forced to raise equity or debt at distressed prices, they'll be in trouble and shareholders will either get diluted or will lose everything.

I think it's impossible to predict what's going to happen, and so I'm staying out. Maybe someone like Marty Whitman, who makes a living off distress investing, can give a reasonable estimate of what might happen.