MBIA, Ambac and GICs: The Other View

Includes: AMBC, MBI
by: John Hempton

The Street takes exactly the opposite view of MBIA (NYSE: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

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