Government bailout of Ambac and MBIA?

Discussion in 'Economics' started by Daal, Jan 18, 2008.

  1. Daal


    Can anyone guess the probability of a ala 98 intervention to keep ambac and mbia afloat?
    my curent target for the stock is $0 since in 98 the fed had shown willingness to be brutal to the investors of LTCM making sure they would be punished
    I cant imagine common shareholders getting anything out of these companies(even if they survive by a bailout)since the policy holders exposure, debt and everything else overwhelm the book value of this company many times over and they are all senior to the common stockholder plus those 'surplus notes' will have their take too but I could be wrong
  2. Ambac Insurance Loses AAA Ranking at Fitch Ratings (Update4)

    By Christine Richard

    Jan. 18 (Bloomberg) -- Ambac Financial Group Inc. became the first bond insurer to lose its AAA rating after Fitch Ratings downgraded the company.

    Ambac Assurance Corp. was lowered two levels to AA and may be reduced further, New York-based Fitch said today in a statement. The downgrade ``reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction,'' Fitch said.

    Without its AAA rating New York-based Ambac may be unable to write the top-ranked bond insurance that makes up 74 percent of its revenue. Ambac may quit the business or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York. The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac.

    ``This makes Ambac insurance toxic,'' said Matt Fabian, senior analyst and managing director at Municipal Market Advisors in Westport, Connecticut. ``The market has no tolerance for a ratings-deprived insurer.''

    Ambac, the second-largest bond insurer, fell 4 cents to $6.20 in New York Stock Exchange composite trading. The company today abandoned plans to raise $1 billion in capital after a 70 percent plunge in its shares in the past two days.

    Moody's Investors Service and Standard & Poor's, the two largest ratings companies, are also reviewing Ambac's ratings for a possible reduction. Moody's said this week it may also cut the ratings of MBIA Inc., the largest bond insurer.

    ``Matter of Time''

    ``The likelihood is quite high the others will follow,'' said John Tierney, credit market strategist at Deutsche Bank AG in New York. ``Barring some significant development on new capital, it's just a matter of time before S&P and Moody's act on MBIA and Ambac.''

    The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg.

    Fitch last month demanded the company raise $1 billion by the end of January. Ambac on Jan. 16 slashed its dividend 67 percent and said it would sell stock or convertible notes to bolster its capital. The plan provoked a boardroom dispute and led to the departure of Chief Executive Officer Robert Genader.

    Michael Callen, the 67-year-old named interim CEO of Ambac, this week said the company planned to raise capital in ``an accelerated time frame.''

    Evercore's Call

    Shareholder Evercore Asset Management LLC yesterday called on Ambac to shelve the equity plan and relinquish its AAA rating. Ambac should allow the policies it has written to run off, Evercore Chief Investment Officer Andrew Moloff said yesterday in a letter to Ambac's board. Evercore said Ambac had ignored a previous letter it had sent.

    Moody's said this week it may cut Ambac's ratings after the company forecast writedowns of $3.5 billion on subprime-mortgage securities. Fitch demanded the company raise $1 billion by the end of the month. Standard & Poor's today said it may cut Ambac's rating because its capital-raising options are ``impaired.''

    MBIA raised $1 billion last week in the sale of surplus notes and last month entered a deal to sell $1 billion of equity to private-equity firm Warburg Pincus LLC. Both companies slashed their dividends and took out reinsurance on some securities to help shore up capital.

    The surplus notes plunged as low as 70 cents on the dollar today, indicating a yield of about 25 percent, traders said. MBIA fell 89 cents, or 10 percent, to $8.33 on the New York Stock Exchange, extending its 56 percent decline this week.

    Bonds Plunge

    Ratings companies, which affirmed their assessments a month ago, are scrutinizing bond insurers to ensure they have enough capital to protect against losses. S&P yesterday said industry losses on subprime securities will be 20 percent more than it initially forecast.

    Ambac has a capital shortfall of about $400 million under the new assumptions, S&P said.

    Ambac's 6.15 percent bonds due in 2037 have plunged by 25 cents on the dollar this week to 35.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield has soared to 17.6 percent from 10.5 percent and the extra yield investors demand over government securities with similar maturities has widened 7.2 percentage points to 13.4 percentage points.

    Prices for credit-default swaps that pay investors if Armonk, New York-based MBIA or Ambac can't meet their debt obligations imply a 73 percent chance the companies will default in the next five years, according to a JPMorgan Chase & Co. valuation model.

    Credit-Default Swaps

    Contracts tied to MBIA's bonds have risen 10 percentage points the past two days to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.

    Credit-default swaps on Ambac, the second-biggest insurer, rose 11.5 percentage points to 26.5 percent upfront and 5 percent a year yesterday, prices from CMA Datavision show. They were unchanged today.

    Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

    Ambac agreed to guarantee almost $200 million of bonds sold so far this year, or 6 percent of the market for new insured issues, according to data compiled by Bloomberg. Ambac's market share was 22.5 percent as of Sept. 30, 2007, according to a Dec. 13 report from Bear Stearns Cos.

    To contact the reporter on this story: Christine Richard in New York at

    Last Updated: January 18, 2008 16:27 EST