Will The Muni Bond Market Embrace Connie Lee?

Ambac has won approval from Wisconsin to create a new guarantee business called "Connie Lee". Bloomberg discusses the situation in Ambac, Using an Accounting Change, Posts Net Income.

Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after using an accounting change to record a $5.2 billion gain related to its debt securities.

Net income rose to $823.1 million, or $2.80 a share, from $173 million, or $1.67, a year earlier, New York-based Ambac said in a statement today. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share, compared with an average estimate for a loss of 61 cents from five analysts surveyed by Bloomberg.

Claims on collateralized debt obligations -- responsible for $492 billion in credit losses and asset writedowns at financial firms worldwide -- will rise to $1.1 billion at Ambac, taking likely impairments to more than $3 billion, the company said. Ambac, MBIA Inc. and three other bond insurers have posted record losses and were stripped of their AAA status after expanding from guarantees on municipal bonds to securities tied to mortgages that are now going delinquent at the highest rate since 1985.

Ambac, once the second-largest bond insurer, reported a $1.7 billion net loss in the first quarter after a $3.3 billion loss in the fourth quarter of 2007. A rise in the risk premiums on Ambac's own debt in the second quarter lowered the value of bond guarantees, which was allowed to be reflected as a gain under new accounting rules, resulting in the quarterly profit.

Ambac and MBIA have been losing new business to Hamilton, Bermuda-based Assured Guaranty Ltd. and New York-based Financial Security Assurance Holdings Ltd. Ambac and MBIA had a combined market share of 3.2 percent in the first half of the year, down from 42.2 percent in the same period of 2007.

Ambac's credit enhancement production, a measure of new business, fell 95 percent in the second quarter to $19 million.

Wisconsin regulators are expected to approve Ambac's plan to create a new AAA rated municipal-bond insurer, the company said today. The business, which wouldn't underwrite the structured finance securities that led to Ambac's losses, "starts fresh with a clean balance sheet," Callen said in the statement.

Callen said later on a conference call with investors that the new business, called Connie Lee, would have a separate board and is likely to be embraced by the municipal-bond market.

The combined 3.2% market share of Ambac (ABK) and MBIA (MBI), in the first half of the year in conjunction with a 95% drop in new business at Ambac tells the story.

I fail to see how Connie Lee can possibly be rated AAA, but then again the rating agencies turned a blind eye to the realities of the guarantors for something like forever. And regardless of what the rating agencies say, winning business and trust is not going to be easy for Connie Lee.

Here is the reality of this mess: There is certainly no reason for the municipal bond market to embrace the Pig In A Poke known as Connie Lee. However, it might pay to wait and see if Paulson starts hawking this product. Right now anything is possible.

Addendum

"MC" Writes:

Connie Lee has been around for a long time as you can see from this bond dated 1993. They were bought by Ambac in the late 90's I believe and my best guess is that the only reason they are using this name again is that there has always been a little bit of separation as the Connie Lee name was never involved in the CDO business.

What is old is new again.



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