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Thursday, January 17, 2008 11:16 AM


Death Blow For Ambac?


Reuters is reporting Blow for Ambac as Moody's reviews for possible cut.

Moody's Investors Service on Thursday placed Ambac Financial Inc (ABK), which insures more than $500 billion in bonds, on review for a possible ratings cut, an event that could trigger similar downgrades on billions of dollars of debt. A cut could mean the ratings on the bonds it insured -- which amount to $556 billion in value -- would also be lowered, forcing the owners of those bonds to mark down the value of their portfolios.

Moody's announcement came after Ambac, hard hit by the turmoil in credit markets, said it was recording a $3.5 billion write-down, equivalent to nearly two-thirds of its net worth, and plans to raise $1 billion in new capital to maintain its ratings.
My Comment: $1 billion is not close to enough.
MBIA Inc (MBI), the world's biggest bond insurer, sold $1 billion of surplus notes last week to shore up capital and preserve its crucial triple-A rating.

"The markets are going to remain fragile until the monolines are recapitalized and their ratings are reaffirmed," said Scott Wilson, credit analyst with Royal Bank of Scotland, adding that markets were already nervous awaiting write-downs by banks.
My Comment: $1 billion is not enough for MBIA either. Thus those ratings shouldn't be reafirmed. This headline says about all you need to know: Ambac Slashes Dividend and Reports Loss of $32.83 Per Share.
MBIA's notes, issued last week, have already fallen to about 89.5 cents on the dollar, now yielding about 17 percent, compared to 14 percent when they were first issued on January 11.

"A triple-A rated company getting money at 14 percent is ludicrous in my opinion -- the market is not happy with that," said Dilip Shahani, credit analyst with HSBC in Hong Kong.
My Comment: Yes it is ludicrous. It just goes to show everyone how bad the rating agencies are when there is this discrepancy between what the market is saying and what the rating agencies are saying. We saw the same thing with Enron, we are seeing it again now.

Ambac Responds

Ambac Replies To Moody's Report
In view of the uncertainty generated by Moody’s surprising announcement, Ambac is assessing the impact of this action on the Company’s previously announced capital plan.

Management remains confident in Ambac’s insured portfolio and will communicate further on these matters in its previously scheduled conference call on Tuesday, January 22, 2008 at 10 a.m. (ET). The call in number to listen in is 877-407-0778 (U.S.) and 201-689-8565 (outside the U.S.). The conference call will also be webcast live at www.ambac.com.
The only thing anyone can possibly be surprised at is how long Moody's, Fitch, and the S&P ignored this problem.

OK what can Ambac Do? Raise money at 17%? Raise money at 25%? Eliminate the rest of its dividend? Announce bankruptcy?

The latter makes the most sense if you ask me. Not only is Ambac's credibility severely tarnished and its AAA rating in severe doubt, it now has to compete against Berkshire Hathaway (BRK) and Warren Buffett. The message from the market today is that survival of AMBAC and MBIA is in severe doubt. Losing the AAA rating may be the final death blow for these companies.

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