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I was going to post an update on the Bear Stearns and GGP work, but since there was such adverse price action in Ambac stock I decided to follow up on that - again. So, here we go. If you are new to the blog be sure to click, follow and download all the links. They are worthwhile. If you are a regular to my monoline musings, at least download the following pdf link. It is new, and worth a quick reading. Feel free to email it and pass it around as well. I annotated a FAQ directly off of their site.  

  

 From the Ambac.com FAQ about 2 1/2 months ago

See first line of page 2 here: pdf ABK FAQ 12/26/07 - Reggie Annotated.

Question Category
Does Ambac have any plan to reduce the amount of its dividend? LIQUIDITY
 Answer
Ambac does not currently anticipate reducing its common stock dividend.
Updated as of 11/8/07

 

From this blog author on 11/28/07: Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion of Equity!  -

Alternatively, we have calculated the provisioning for losses that Ambac will need to make every year on the basis of the anticipated losses that the company will have to pay in coming years. In doing so we have assumed that the 85% of the premium written from 2007 onwards (excluding 15% as underwrting expesnse) will be transferred to the loss expense reserve every year. The loss reserve uptill 2007 is taken from comapny's balance sheet. The losses have been calculated on the basis of various default probabilities assummed in Strucutred Finance, Direct Subprime RMBS and Consumer Finance portfolios. We have assumed a duration of 5 years to spread the losses on various vintages over the coming years. We anticipate the company will have to create a provisoin of $ 6.8 billion under the base case scenario. That;'s about $67 per share, they are halfway there already with $33 per share announced to be expected today. Mayhap someone from this blog should invite the Ambac management team to register...

From the news sites this morning, Jan 16, 2008  

 
  8:00 AM 1/16/08

Ambac Announces Capital Enhancement Plan to Raise in Excess of $1 Billion - BusinessWire  (I will address this in a later post, probably tomorrow, basically Ambac will need to raise 76% of its current market cap to reach this goal, and according to my calcualtions  it will need to raise at least another $3 billion - or 200%+ of its market cap - to remain a going concern.) From the release:  Ambac "has approved a plan to strengthen its capital base through the issuance of at least $1 billion of equity and equity-linked securities. (Shorts rejoice, this portends 50% dilution) This plan may also include additional capital from reinsurance (earnings dilution) or issuance of debt securities (I know Moody's says they are AAA/AA and all, but can this company really handle additiona debt service?). Ambac said that it is committed to maintaining its triple-A financial strength. (Maintainig, you have to alread have it in order to maintain it!). By raising at least $1 billion in capital, Ambac is expected to meet or exceed Fitch Ratings' current triple-A capital requirements for the Company. (But you still won't have enought money to meet what I expect your losses to be. I don't know what world Fitch is analyzing, but as I have calcuated it, you need a lot more money just to survive - AAA is out of the question). The Company noted that its existing capital position currently meets or exceeds the triple-A capital requirements of both S&P and Moody's. (And we all know how accurae these companies have been with the subprime/second lien/CDO assumptions, so their ratings grant us great comfort in your solvency. After all, they did a hell or a job rating those CDOs) As part of its capital initiative, Ambac also said that it will reduce the quarterly dividend on its common stock from $0.21 per share to $0.07 per share. I feel you should have done this a long time ago." 

Also in this article is the expection of a $5 per share operating loss (primarily CDO losses and 2nd lien/HELOC losses) and a $32.88 per share mark to market loss (that's substantially more then their share price. What makes this funny is that management is still proclaiming that this mark to maket losses are not predictive of future claims and that "barring further deterioration in the market" the losses will reverse themselves. Hmmm. They want to bar further deterioration in the beginning of the bust of the greates housing bubble in the history of this country. Interesting. I posted a market to market exercise using the E*trade deal as a mark (see Ambac Portfolio Analysis: Etrade mini-app) and again on the auto finance portfolio (see Ambac Auto Receivables - Public Model) as well. This press release serves to validate my findings on both counts. The E*Trade deal values Ambac's MBS portfolio at bout 13 cents on the dollar. Ambac states "In addition, book value per share is expected to be approximately $21.00 per share at December 31, 2007." As I have told the readers of my blog ad nauseum, "Reported book numbers are not necessarily reflective of actual market value of the book".  Keep in mind, the losses as I have calculated them will bankrupt Ambac withouth significantly more capital than they are quoting here. For those who want a more hands on perspective I prepared a downloadable window into Ambac's problems.

  5:56 PM 1/8/08 Fitch Places 404 ABS Bonds on Watch Negative Following Ambac Rating Action - BusinessWire  (for those who don't think mark to market losses mean anything)
  5:25 PM 1/7/08 Fitch Places 1 Class of Pennsylvania Higher Ed Assistance Agency Student Loan Revs on Watch Negative - BusinessWire  
  5:11 PM 1/3/08 Correction: Fitch Places 404 ABS Bonds on Watch Negative Following Ambac Rating Action - BusinessWire  
  4:14 PM 1/3/08 Fitch Places 3 Classes of Finance Authority of Maine on Rating Watch Negative - BusinessWire  
  1:22 PM 12/26/07 Correction: Fitch Places Ambac-Insured Ballantyne Re Notes on Watch Negative - BusinessWire  
  2:38 PM 12/24/07 Fitch Places Ambac-Insured Ballantyne Re Notes on Watch Negative - BusinessWire  
  8:10 PM 12/21/07 Fitch Places 388 ABS Bonds on Watch Negative Following Ambac Rating Action - BusinessWire  

 

In addition:

NEW YORK, Jan 16, 2008 (BUSINESS WIRE) -- Coughlin Stoia Geller Rudman & Robbins LLP ("Coughlin Stoia") ( http://www.csgrr.com/cases/ambac/) today announced that a class action has been commenced in the United States District Court for the Southern District of New York on behalf of purchasers of Ambac Financial Group, Inc. common stock during the period between October 19, 2005 and November 26, 2007 (the "Class Period").
The complaint charges Ambac and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Ambac is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in both the public and private sectors around the world. The Company and its subsidiaries operate in two segments: financial guarantee and financial services.
The complaint alleges that during the Class Period, defendants issued materially false and misleading statements regarding the Company's business and financial results related to its insurance coverage on collateralized debt obligations ("CDO") contracts. According to the complaint, the true facts, which were known by the defendants but concealed from the investing public during the Class Period, were as follows: (i) that the Company lacked requisite internal controls to ensure that the Company's underwriting standards and its internal rating system for its CDO contracts were adequate, and, as a result, the Company's projections and reported results issued during the Class Period were based upon defective assumptions and/or manipulated facts; (ii) that the Company's financial statements were materially misstated due to its failure to properly account for its mark-to-market losses; (iii) that, given the deterioration and the increased volatility in the mortgage market, the Company would be forced to tighten its underwriting standards related to its asset-backed securities, which would have a direct material negative impact on its premium production going forward; (iv) that the Company had far greater exposure to anticipated losses and defaults related to its CDO contracts containing subprime loans, including even highly rated CDOs, than it had previously disclosed; (v) that the Company had far greater exposure to a potential ratings downgrade from one of the credit ratings agencies than it had previously disclosed; and (vi) that defendants' Class Period statements about the Company's selective underwriting practices during the 2005 through 2007 timeframe related to its CDOs backed by subprime assets were patently false; as the Company's underwriting standards were at best aggressive and at a minimum were completely inadequate. As the truth began to be disclosed, shares of Ambac common stock plummeted, causing substantial losses to investors.
Plaintiff seeks to recover damages on behalf of all purchasers of Ambac common stock during the Class Period (the "Class"). The plaintiff is represented by Coughlin Stoia, which has expertise in prosecuting investor class actions and extensive experience in actions involving financial fraud.
For substantially more on the monolines, see my  Insurers and Insurance section of the blog.