Ambac Management Should Read Blogs More Often

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:  ABK FAQ 12/26/07 - Reggie Annotated.

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:

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.

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Trust
written by M M, January 16, 2008

Nice call! Pain is pleasure. CEO resigned IMMEDIATELY, this after 20 years of employment. OUCH!

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...
written by Jon Pearlstone, January 16, 2008

Well I have always respected the gospels of Matthew, Mark, Luke and John

Now I am officially adding the gospel of REGGIE!

So glad you started blogging, you are the place to go to find what's really out there!

Now figure out a way to get your GGP projections to a lower share price so I can dive in short!

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AGO -- what's the deal
written by Jon Pearlstone, January 16, 2008

Oh and you got me all excited about AGO in your earlier blog post. Are you gonna dig into their world too since they are directly tied to Ambac (and have a lot more meat on their bones!)

thanks again

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written by Reggie Middleton, January 16, 2008

I thought about AGO, but I am spread too thin as it is. Sooner or later, the reinsurers will get my attention, but things are moving fast. Remember, 2.5 months ago, Ambac was over $60. GGP is a VERY conservative estimate, and I feel made a good short it is just that the market is moving very quickly these days. It is down a lot.

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Assured Guaranty
written by Mark Edmunds, January 17, 2008

The information that I have seen suggests that Assured Guaranty and FSA were the two financial guarantors that avoided the really risky stuff (mainly ABS CDOs) that the rest of the market wrote. If the entire bond insurance market collapses, then Assured and FSA obviously become casualties (though there is probably some value in the runoff of their books). If the market persists in some form or another, the most likely "winners" will be Berkshire, FSA, and Assured Guaranty.

If anyone else can share intelligent comments on Assured's situation, they will be greatly appreciated.

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Don't believe everything you read
written by Reggie Middleton, January 17, 2008

If the markets have taught anything over the last year, it is that. This is my http://boombustblog.com/compon.../Itemid,0/ :
"Ambac buys reinsurance from Assured Guarantee, a company in the same business as Ambac taking very similar losses, and it gets to retain its AAA rating??? Doesn't anyone see concentration risk and an uncomfortable amount of correlation here, or is it just me?

Assured Guaranty reported a net loss of $115.0 million, or $1.70 per diluted share, for the quarter ended September 30, 2007 compared to net income of $37.9 million, or $0.51 per diluted share, for the third quarter of 2006. The decline in net income was primarily due to an after-tax unrealized mark-to-market loss on derivatives (hey, isn't that what Ambac and MBIA said as well?) that was announced by the Company on October 22, 2007 of $162.9 million, or $2.40 per diluted share, on financial guaranties written in credit default swap ("CDS") contract form. As of November 30th (38 days later), it reported that it has after tax mark to market losses of $220 million. They are averaging one and a half million dollars per day in value loss, with this rate bound to accelerate in the very near future (they only had $1.6 million in 9/06 - that's a 200x increase). The macro conditions that brought upon the CDS (paper) loss are getting much worse, not better as the trend clearly indicates. About 70% of the unrealized CDS loss stems from RMBS and CMBS swaps. Well, you know how I feel about the residential market. Here is how I feel about the commercial market. Things are about to get much worse. Despite all of this, AGO now accepts $29 billion of additional ceded risk from one of the most dangerous monoline portfolios in the business. I am appalled!

I hear a lot of people crooning about this being only paper losses, and not actual claims until payment is defaulted or missed or principal is actually and materially impaired before maturity. Well, it is happening now, and in droves. AGO's management laments on how they have minimal exposure and losses to direct subprime liabilities, which appears to be true with a casual glance at their reporting, but the devil is again, in the details. Aside from 75% of AGO's mortgage portfolio being in the most toxic vintages of 2006 and 2007 (which most likely will lead to problems down the line), they have a strong correlation in product mix with Ambac, the company they just reinsured $29 billion of exposure. Ambac's loss exposure is stemming primarily from their structure product and consumer finance guarantees, not their residential mortgages, per se. Structured finance in particular is what got them in trouble. There is no real loss history on this stuff, because it is brand new and the losses that are being witnessed now are tremendous. Well, hazard a guess as to where the majority of Assured's earned premium comes from? That's right, structured finance. As of 9/30/07, it was 58%. Now, with the acquisition of Ambac's risk, and of course depending on exactly what it was that was actually reinsured (we don't really know yet, do we?) it will/can definitely shoot upwards, significantly upwards. No matter which way you look at it, there is a VERY high concentration of risk, especially in an area with no real discernible loss history and the only real discernible losses being significant. Compare and contrast to the actuarial loss histories used in life, vanilla P&C, and health lines - we're talking multiples of decades (like 50 - 60 years ), not just a few years as in CDOs. That is REAL insurance. This new fangled, financially (not so)engineered, structured product guarantee business is gambling with shareholders capital, pure and simple - slot machines - Vegas style!

AGO used capital to buy back shares in lieu of reserving for future losses through '06 and announced a new buy back program going forward last month in November to buy back more shares. Hey, why provision for losses when we can buy back shares... Just a few weeks ago, Assured then announces its intention to sell $300 million in shares to shore up its capital in its reinsurance division to go huntin' for new business. Like Moody's, these guys are a fickle bunch. So, my astute readers should ask, why didn't they just take the money that they used to buy back the stock and simply reinvest it in their business to begin with??? Hmmm! Good question. Could it be that management did not have the foresight to see this opportunity coming just last month. If so, what else did they "not see"? I would suggest you look into the risk profile of their newest addition to their portfolio."

I haven't ran through the numbers on AGO, but my gut tells me they are suspect, highly suspect.

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