Ambac Blows It ... Again

News is out that Ambac Reinsures $29 Billion Portfolio to Keep Rating.

Ambac Financial Group Inc., struggling to avoid the crippling loss of its AAA credit rating, took out insurance on $29 billion in securities it guarantees. The world's second-biggest bond insurer agreed to transfer the risk that the securities will default to Assured Guaranty Ltd., according to a statement today. Reinsuring the debt will free up capital backing those bonds, Ambac said.

Ambac guarantees $556 billion of securities and the loss of its AAA rating jeopardizes the rankings on that debt as well as threatens the New York-based company's biggest source of revenue. "Reinsurance is a valuable, capital-efficient and shareholder-friendly tool for managing risk and capital," Ambac Chief Executive Officer, Robert Genader said in the statement.

My Comment: Reinsurance on $29 billion out of $556 billion is unlikely to do anything but waste money. Right now this it is too little, too late, and on the wrong stuff. It certainly is not shareholder-friendly. At best, all it will do is dilute future earnings.

A loss of the top rating would wipe out Ambac's main business of guaranteeing debt. If all the companies were to falter, $2.4 trillion of insured securities would be thrown into doubt, costing as much as $200 billion, according to data compiled by Bloomberg.

Assured Guaranty has less risk than its competitors from mortgage-related securities, the rating companies said. Fitch affirmed Assured Guaranty's AAA insurance and reinsurance ratings yesterday after the company announced a plan to raise $345 million through share sales and give the proceeds to Assured Guaranty Re Ltd. so it can reinsure more deals.

My Comment: Fitch is in no place to affirm anything. For a good look at Fitch's competence, please see Fitch Discloses Its Fatally Flawed Rating Model.

The debt reinsured by Assured includes structured finance, public finance and international securities, Ambac spokesman Peter Poillon said. Assured won't reinsure any CDOs, he said. Poillon declined to comment on the amount of capital freed up by the deal.

My Comment: Poillon would not comment on the amount of capital it freed up because the amount was likely negligible. The big problem for Ambac is CDOs and Assured Guaranty Ltd. apparently was not dumb enough to reinsure those.

Ambac insures $8.8 billion of securities backed by subprime mortgages and $29.2 billion of collateralized debt obligations that repackage pools of subprime mortgage debt and slice them into new pieces with varying degrees of risk, according to the company's Web site.

My Comment: Ambac did nothing to address the core issue: what to do with $29 billion in CDOs and another $8.8 billion in subprime slime. All Ambac accomplished was selling of assets that were likely good while retaining garbage that likely was not.

Ambac Monthly Chart



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For more on the folly of Ambac's buyback program please see Stock Buybacks: A Good Thing Or Slipped DISCs?

MBIA Also In Trouble

Like Ambac (ABK), MBIA (MBI) is also in trouble and in need of capital infusions. MBIA Got $1 Billion From Warburg Pincus but $500 million now with promises of another $500 million does not come close to addressing MBIA's problem.

MBIA Daily Chart



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Notice the spike from $30 to $38 as if $500 million from Warburg Pincus was going to accomplish something. It won't. Nor will selling reinsurance by Ambac accomplish anything but shareholder dilution. Both companies remain capital impaired and deep in trouble.

These moves by Ambac and MBIA are nothing but a dog and pony show that's all dog and no pony.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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