Exactly as I predicted, there is no V-shaped recover, U-shaped recovery, or any other representative letter of the alphabet. We are mired in structural downturn exacerbated by a cyclical downturn, popping of the everything bubble, and a horrible poor response to a global pandemic. There is no good news here!

 

  • I've had this research on MBIA sitting on my desktop for some time now, too busy to convert it into a post for the blog. The macro situation stemming from the real estate bust is unfolding just as I have surmised, albeit a bit quicker and more far reaching than I originally thought. It is scary, for nobody wants to see bad things happen to other people, and I don't want to get caught in a financial downturn regardless of how well prepared I try to make myself. On the other hand, these situations create significant opportunity for gain, primarily from those who refuse to acknowledge the fact that the wave is not only coming, but has reached us quite a while back. I have learned unequivocally what many probably new for some time now. What is that you ask? You really just can't trust government data. Now, I don't want to get into politics and conspiracy theories, but the data as of late has been so far removed from the obvious reality for many that it is almost signaling that the government doesn't even want you to heed the data and is giving you the requisite warning signals. Examples of which are employment data and inflation. Alas, and as usual, I digress, as such is the mind of insane idiot savant that my kids call Dad.

    Now, back to the title - What so special about the number 104? It is the number that will probably scare the pants off of anyone who is in equity investors, or potentially anyone who is a customer, of MBIA's insurance and guarantee products. It is the number that when reached, will leave the equity investor with shareholder certificates worth nothing. It is the number where MBIA's equity is wiped clean. Why are you being so damn cryptic Reggie, you ask? Because, I need for you to go through this history of how we came to this point before I explain in detail, so as to get a clear and comprehensive understanding of the situation. That is part of it; the other part is just because I feel like it. Now, let me give you a little cartoon of what the number is, then a background of how we got in this mess to begin with, then an analysis that shows how I got to this number. As usual, you can click on any graph to enlarge it.

    And then...

    Some time ago I came across this report on the MBIA and ABK by Pershing Square and found it absolutely intriguing. I posted it on this blog on September 3rd, when these companies were trading in the 60's and 70's roughly, and respectively (sometimes it actually pays to read this blog:-). I was actually impressed enough to take a small short position of my own without doing my own forensic analysis. This is something that I regret. Why? Because I am willing to assume significant risk once I convince myself of the strength of a position. Using third party research, I dabble at best - and rarely do I use third party research. So, I dabbled when I should have looked harder and took a significant position. After the fact, I looked further into the industry on an anecdotal basis, then all of a sudden, Bam! The proverbial feces hit the fan blades. The stocks fell so far, so fast, I was taken aback. So, I asked part of my analytical team to take a look at these guys, for I knew that a major problem the monolines, the banks, and the builders all had was a lack of understanding and respect for the rate of decline in value and default of instruments linked to bubble real estate - combined with excessive leverage. So they took a cursory look for me, and they pretty much confirmed my suspicions, but it is not straightforward. There conflicts of interest issues that goes far and wide. So much so, that I will most assuredly not be making anymore friends with this blog. Many of the financial professionals know this, but the layman may not.

    What's wrong with the ratings agencies?

    What's wrong with the ratings agencies? All of the major rating agencies feel MBIA is in good standing to weather the storm. Coincidentally, they all receive significant fees from the monolines and their customers. Hmmm! Now, there is this song by Kanye West, the rapper. A verse goes, "I'm not saying she's a gold digger…" Well, to make a long story short, any analysis born from compensation received from the entity you are analyzing will always be suspect, at least in my eyes. Conflicts of interest and financially incestuous relationships appear rampant to the paranoid conspiracy type (like me). If you remember my analysis of Ryland, I looked at data as far back as 1993. That gave a succinct, but barely acceptable snapshot of what to expect in turbulent times from a historical perspective. You would need much more data to analyze the more complex topic of MBS. It is believed by the naysayers, that the major ratings agencies have sampled data from only the good times, thus that is why their worst case scenarios still smell like roses. Their predictive prowess over the last few years doesn't look very impressive either. Massive swath of investment grade securities (that they, themselves, labeled investment grade - and were paid by the securities' issuers to do so) are being downgraded straight to junk. I know if I invested in AAA bonds that are losing principal and downgraded to junk in a year or two by the same rating that gave it an investment grade rating in the first place, I would be pissed. But, that is what happens without the proper due diligence, I guess. At least that is what the ratings agencies are bound to say. When looking at data gathered from the real estate boom, and not the busts, you get:
    ----- EXTENDED BODY:

    Data sets limited by favorable recent year trends

     

  • Low interest rates, which improving liquidity which allows bad risks to refi out of their situations
  • Rising home prices, which allow bad risks to sell out of their situations
  • Strong economic environment, allows for better earning power
  • Product innovation (hey, I can sell anything)
  • No payment shocks in existing (boom and bubble) data because borrowers have been able to refinance
  • Performance of securitizations benefited from required and voluntary removal of troubled loans

    Rating agencies assume limited historical correlation (20%-30% for sub-prime) will hold in the future (we've heard this line before) as the credit cycle turns (it is obviously turning now), correlations could approach 100%.

    Just imagine if the ratings agencies are as accurate with their opinion of MBIA as they have been with their opinions on the securities that MBIA insures. Look out below!!!

    Smaller advisories, coincidentally those that do not receive significant fees from the monolines and their customers, have a different take on the monolines. Take Gimme Credit, for example. Gimme Credit downgraded MBIA's bonds to "deteriorating" from "stable" earlier last week, citing the potential for write downs. They also stated that the other major agencies should have done so a while back. CDS market has also moved against the big monolines. I know everyone has an opinion, but the problem starts to look like a problem when you can prognosticate the opinions based on the incestuous nature of the money trail.

    Now, let's be fair to the big agencies

    To be fair to the big ratings agencies, they dance a precarious line. If they do downgrade the monolines, they, by default, downgrade all of the bonds and entities that they insure. That is not just mortgages and CDOs, but municipals, hospitals, etc. This ripples through various investment funds, government funds, the whole nine yards. Then again, it really doesn't look good when the companies that don't get fat fees from the insurers and their clients are so much quicker to downgrade than those that do. So they are damned if they do and damned if they don't. Then again, there a fair share of boutique research houses that say that it would take an extremely fat tail and near 100% correlation amongst the insured securities to cause failure in the monolines. Well, have you ever been to Tasmania? Tasmanian devils have very fat tails, as well as a whole host of other animals such as fat tailed skinks and occurrences with a 1 in 2 million chance of happening such as the outlier that took down LTCM. You see, when everyone is leveraged up, and there is one door when someone yells fire - it is going to get awfully crowded around that exit. Call it correlation, call it common sense, call it whatever, but I think we will soon be calling it a foregone conclusion. These fat tails don't have to be as fat as the financial engineers think they have to be. As for the 100% correlation, well that was briefly mentioned in the bullet list above, but from a common sense perspective, as the subprime underwriting really takes effect (what we have seen thus far is just the start), everyone in leveraged instruments (i.e. everyone) will start running for the exits at the same time - hence 100% correlation. I figured this one out without a model, nor a Financial Engineering PhD. I know there are those who disagree with me or may think that I don't know what I am talking about. Well, a few months will reveal one of us to be wrong. Somehow, I don't think it will be me.

    Relation between MBIA and Channel Re

    Channel Re is a Bermuda-based reinsurance company established to provide 'AAA' rated reinsurance capacity to MBIA. Renaissance Re Holdings Ltd, Partner Reinsurance Co., Ltd, Koch Financial Re Ltd and MBIA Insurance Corp are the investors in Channel Re. MBIA has a 17.4% equity stake in Channel Re and seeded Channel Re with the majority of its business. Channel Re has a preferential relationship with MBIA.

    Channel Re has entered into treaty and facultative reinsurance arrangements whereby Channel Re agreed to provide committed reinsurance capacity to MBIA through June 30, 2009, and subject to renewal thereafter. Channel Re assumed an approximate of US$27 bn (par amount) portfolio of in force business from MBIA Inc and has claims paying resources of approximately US$924 mn. (source Renaissance Re 10K. Swapping Paper Losses Channel Re is insulated against huge losses because of adverse selection in terms of pricing and risk on the assumed portfolio of MBIA. The agreement between the Channel Re and MBIA protects channel Re against any major losses. This financial reinsurance scheme smells a little fishy.

    Is MBIA dumping mark to market losses on Channel Re through reinsurance contracts?

    The SEC and the NYS Insurance Dept. thought so. In addition, there is overlapping risk retained through the relationship - MBIA has an equity investment of 17.4% in Channel Re. Channel Re assumes 52.37% of the total par ceded by MBIA of US$74 bn. The total par ceded not covered through reinsurance contracts due to the equity investment of MBIA in Channel Re is US$6.7 bn. Thus, there is a little under $7 billion dollars of risk that many think MBIA is covered for that it really is not. Then there is the case of diversity of Channel Re's portfolio. I have a slight suspicion that MBIA's business makes up much too much of it to be considered well diversified. Rennaisance Re, the majority owner, has also come clean admitting that Channel Re has a very high exposure to CDO losses and mortgage backed securities. Uh oh! This admission came from the extreme losses Channel Re took last quarter due to mark to market issues for mortgage backed paper. Again, is MBIA doing the old financial reinsurance scheme that was outlawed not too long ago? My gut investor's feeling tells me...For those not familiar with the reinsurance game, here is a primer on financial reinsurance

    Haven't we learned how dangerous leverage can be?

    Particularly when you don't have a firm grasp on the underlying collateral and risks involved

    Do you remember my exclamation of the incestuous relationships? There is the moral hazard issue of everyone getting paid up front except for the ultimate risk holder.

    Keep in mind, in terms of terms of the ratings agencies:

  • They only get paid of the deal closes favorably, and banks go ratings opinion shopping for the desired results - very similar to the residential real estate boom where brokers went shopping amongst appraisers to get the blessed number that they desired. Without that number, the appraiser/ratings agency just won't get paid.

  • Fairness opinion fees are only really not that synonomous with fairness, since the grand arbiter of fairness is the guy that paid to get the deal done in the first place.

  • Structured finance (like that of MBIA's business) is 40% of the rating's agencies' revenues and pay out considerably higher margins than the plain vanilla bond business

  • Reputational risk exists when opinions are changed quickly. They do not want people like me asking why a tranche can go from AA to CCC in a year!!! I think what companies such as Fitch are figuring out is that reputational risk exists in greater part when opinions are changed too slowly and are questioned by pundits publicly in the face of failure. I have noticed that Fitch has gotten much more aggressive than the other two major agencies.

  • There are several other reasons, which I won't go into here, which are bound to lead one to believe that conflicts of interests are rampant.

    So, if I am right, and the insurers are wrong, what happens as default rates increase?

    The 7 graphics immediately above are from the Pershing Capital Report linked above.

    Monoline insurers make a very unique counterparty. Unlike guidance of traditional ISDA contracts, and unlike traditional insurers, financial guarantors don't put capital up front, they don't post additional capital in the case of contract value decline, and need not post additional capital in the case of an adverse change in their credit rating.

    MBIA is woefully undercapitalized in the event of a major mortgage security default event, despite the opinions of the large ratings agencies. Look at the graph and use common sense.

     

    Image010

     

    As of Q3 of 07, they had approximately 35 basis points of unallocated reserve to cover net (of reinsurance, see the redundant risk through Channel Re note above) par outstanding financial guaranty contracts. Put in lay terms, MBIA, after buying reinsurance to cover itself for potential losses (some of which it has actually bought from itself), has 35 pennies to pay for every $100 of risk protection that it sells to its customers. This is cutting it thin, no matter which way you look at it. Particularly considering how reliably the subprime underwriting of the recent boom has caused defaults to occur, uniformly and with increasing correlation across multiple and historically disparate underwriting classes. Now, this 35 cents of protection coverage for every $100 of risk translates to extreme leverage. If you think the hedge funds took excessive capital risk due to leverage, you ain't seen nothin' yet.

     

    Image011

     

    MBIA easily sports 100x plus leverage for the last quarter or two.

    MBIA has increased exposure to Structured Finance during period of rapid innovation and lower lending standards. It's structured finance exposure has increased along with all of the other housing sector related companies during the boom, more than doubling in the last ten years.

     

    MBIA has significant capital at risk

    Source: Pershing Capital

     

    Source: Pershing Capital

     

    Source: Pershing Capital

     

    Being so sensitive and exposed to CDOs, one would be curious as to what happens if the CDO spreads widen. Well…

    Effect of Change in spread in CDO

       

    Figures in Million of dollars

       

    As of 31/12/2006

       

    CDO Exposure

     

    130,900

    Statutory Capital Base

     

    6800

         

    Assumed Duration of the CDO bonds

    5

     

    Change in Spread that can eliminate capital

     

    In bps

    104

     

    Capital Eroded

     

    6807

         

    Remaining Equity

     

    -6.8


    So, an increase of 104 basis points in CDO spreads wipes out the equity of MBIA, TOTALLY wipes it out.

    To put this into perspective, let me show you the entire sensitivity grid. Hey, no matter which way you look at, these guys are at risk. They have $6,800 in capital. Just move your finger over any combination of CDO duration and spread in basis points, and if you come close to that 6,800 figure, bingo! The current duration average is approximately 5 years. So the question is, "Will spreads reach 104, or more?" Well, look at the charts above that I posted from Pershing. Better yet, look at the subprime underlyings performance, which can be mimicked by the ABX from markit.com. Horrendous, indeed.

     

     

    Sensitivity Analysis

           
       

    Spread in BPS

    Duration

     

    100

    102

    104

    106

    108

    3

    3,927

    4,006

    4,084

    4,163

    4,241

    4

    5,236

    5,341

    5,445

    5,550

    5,655

    5

    6,545

    6,676

    6,807

    6,938

    7,069

    6

    7,854

    8,011

    8,168

    8,325

    8,482

    7

    9,163

    9,346

    9,530

    9,713

    9,896

    MBIA Valuation

    MBIA appears to have engaged in the all so popular share repurchase method of attempting to raise share prices when they don't have anything better to do with shareholder capital. They have authorized and pursued $2.4 billion worth of share repurchases and special dividends. This is unfortunate since one would believe that they need every dime of capital they can get. Did the "program" work? Well, let's see…

         

    FY2007

     

    FY2008

    All Figures in Millions of Dollars, unless othrerwise stated

     

    Mean Multiple

    High Multiple

    Low Multiple

     

    Mean Multiple

    High Multiple

    Low Multiple

    Tangible Book Value

     

    6,684

    6,684

    6,684

     

    7,513

    7,513

    7,513

                       

    Diluted number of shares

     

    128.7

    128.7

    128.7

     

    123.71

    123.71

    123.71

                       

    BVPS

       

    51.9

    51.9

    51.9

     

    60.7

    60.7

    60.7

                       

    Equity Value Per Share

     

    $22.7

    $30.1

    $16.2

     

    $24.5

    $33.6

    $17.5

                       

    Current Stock Price

     

    $35.2

    $35.2

    $35.2

     

    $35.2

    $35.2

    $35.2

    (Discount)/Premium to FMV

     

    55%

    17%

    117%

     

    44%

    5%

    101%

                       
                       

    Peers

                     
                       

    Name

    Ticker

    Mcap

    Price

    BVPS '07

    BVPS '08

     

    P/B '07

    P/B '08

     

    Ambac Financial Group

    ABK

    4,120

    26.39

    65.44

    74.538

     

    0.40

    0.35

     

    Assured Guaranty

    AGO

    1,570

    19.8

    34.33

    35.804

     

    0.58

    0.55

     

    The PMI Group

    PMI

    1,460

    13.12

    42.05

    43.57

     

    0.31

    0.30

     

    Primus Guaranty

    PRS

    420.8

    5.83

    10.05

    11.26

     

    0.58

    0.52

     

    Security Capital Assurance Ltd

    SCA

    918.34

    7.06

    22.647

    24.44

     

    0.31

    0.29

     
                       

    Average

               

    0.44

    0.40

     

    High

               

    0.58

    0.55

     

    Low

               

    0.31

    0.29

     

    Book Value includes the effect of derivative and foreign currency loss

    So, in a nutshell, despite the significant drop in MBIA's share price, it is still trading at a 55% premium to it's mean adjusted book value comparable price.

     

    MBIA Management Issues

     

    • Resigned (5/30/06): Nicholas Ferreri, Chief Financial Officer
    • Retiring (1/11/07): Jay Brown, Chairman of Board of Directors
    • Resigned (2/16/07): Neil Budnick, President of MBIA Insurance Co.
    • Resigned (2/16/07): Mark Zucker, Head of Global Structured Finance

    Is it me, or do they have a vacuum of experienced management approaching? Worse yet, did these guys know something that we should be aware of? After all, looking at the graphs below, the industry is going to run into some rought subprime underwriting times!

     

    Image015

     

    Subprime Exposure by Vintage Among the Major Monolines

     

    Image016

     

    Remember, the Toxic Waste Vintages are '05, '06 and 1st half of '07

    Source: S&P

     

    Is Europe next?
    A third of MBIA's revenues stem from abroad, primarily in Europe. Most of the action in Europe is in the UK PFI market. These bonds finance roads, schools, rail projects, tunnels and public buildings. Italy, Spain, Portugal and France are also on the bandwagon. Niche sectors such as non-conforming mortgages in the UK (and possible Spain) are particularly susceptible, primarily for the same reasons they are here in the US. Over building, overvalued housing stock (particularly the UK, Spain and Ireland), lax (subprime) financing, and declining property values under loose regulation. It definitely will not help the European insureds if MBIA gets downgraded or CDS spreads widen considerably.

Ambac Financial Group Inc.

Ambac Financial Group Inc. (Ambac or the Company) was a financial services holding company whose principal subsidiaries, Ambac Assurance Corporation and Ambac Assurance UK Limited, were financial guarantee insurance companies. Ambac Financial Group Inc, headquartered in New York, was founded in 1971.

Realizing the impending crisis in housing and consumer finance in the US, BoomBustBlog (the financial blog primarily authored by Reggie Middleton) pointed out the trouble Ambac Financial Group Inc. had and its potential impact on stock prices in an article (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap), in 2007. According to the article, the possibility of insolvency for Ambac Financial Group Inc. was rising as it was insuring more than it could cover and the quality of its insured products in the subprime mortgage, and consumer finance was deteriorating. The credit rating of Ambac Financial Group was downgraded by rating agency Fitch in January 2008, two months after the article was published as the company dropped its plan of issuing new equity capital after writing down repackaged consumer debt due to subprime mortgage crisis. The financial position of Ambac Financial Group continued to degrade and it eventually filed for bankruptcy in November 2010.

Media House

First article published on

List of Articles published

No. of Articles published

The time lag from BoomBustBlog

The time difference from Ambac filing for bankruptcy

Comments

BoomBustBlog

November2007

 

 

November2007

 

 

November 2007

1.   Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap

2.   Welcome to the World of Dr. FrankenFinance!

3.   A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton

3

-

Predicted about 3 years before Ambac's filing for bankruptcy

Predicted well before filing for bankruptcy

Bloomberg

January 2008

January 2008

 

November 2010

1.   Ambac's Agony Deepens

2.   Ambac Tumbles on More Subprime Fallout

3.   Ambac Financial Group Files Bankruptcy to Restructure Bond Debt

3

2 months (reporting on possible credit rating downgrade)

2 months

(reporting on possible credit rating downgrade)

About 3 years

(reporting on filing for bankruptcy)

The first report was published before downgrading of credit rating in 2008 by Fitch

The second report was published before downgrading of credit rating in 2008 by Fitch

The report was published after filing for bankruptcy in 2010

Reported before credit rating downgrading and reacted after filing for bankruptcy

The Wall Street Journal

January 2008

 

 

November 2010

 

November 2010

1.   Monoline Insurers Sink On Credit-Rating Reviews

 

2.   Ambac Says Chapter 11 a Possibility By Year-End

3.   Ambac Files for Chapter 11

3

2 months (reporting on possible credit rating downgrade)

About 3 years

(reporting before possible bankruptcy)

About 3 years

(reporting on bankruptcy)

The first report was published before downgrading of credit rating in 2008.

The second report was published some days before the bankruptcy of Ambac reporting concern of the Company on a possible bankruptcy.

Report on filing for bankruptcy

Reacted before the credit rating downgrade

  Reported before and after the bankruptcy

Financial Times

November 2007

November 2010

1.   Ambac looks to offload risk

2.   Ambac warns over prospect of bankruptcy

2

No lag (reporting on possible credit rating downgrade)

About 3 years

(reporting on possible bankruptcy)

The report was published before downgrading of credit rating in 2008.

The second report was published some days before the bankruptcy of Ambac reporting concern of the Company on the prospect of a bankruptcy

Reported before the credit rating downgrade and also before the bankruptcy filing

Forbes

January 2008

November 2010

1.   You Should Worry About Ambac

2.   Ambac Tumbles Into Chapter 11

2

2 months

(reporting on possible credit rating downgrade)

About 3 years

(reporting on filing for bankruptcy)

The first report was published before the credit rating downgrading by Fitch in January 2008

The second report was published after the filing of the bankruptcy

Reported before the credit downgrading and after the filing for bankruptcy

Reuters

January 2008

 

June

2010

November 2010

November 2010

1.   Ambac Loses Top Rating in Blow to Its Business

2.   Ambac warns of default as bondholders organize

3.   Ambac says may go bankrupt this year; shares sink

4.   Bond insurer Ambac files for bankruptcy

4

2 months

(reporting on credit rating downgrade)

About 2 years 7 months

(reporting on possible bankruptcy)

About 3 years

(reporting on possible bankruptcy)

About 3 years

(reporting on filing for bankruptcy)

The first report was published after downgrading of credit rating in 2008.

The second report was published about five months before the bankruptcy of Ambac reporting concern of the Company on a possible bankruptcy.

The third report was published some days before the bankruptcy

The fourth report was published after filing for bankruptcy

Reacted after the credit rating downgrade  

Reacted in two articles (June 2010 and November 2010) before the bankruptcy on the concern of Company on a possible bankruptcy

Also reacted after the bankruptcy

The New York Times

November

2010

1.   Ambac Files for Bankruptcy

1

About 3 years

It was published after the Company filed for bankruptcy

Reacted only after filing for bankruptcy

Fortune

-

-

-

-

-

-

Business Insider

-

-

-

-

-

-

               

 

Key Highlights:

BoomBustBlog

Reggie Middleton, through his articles, provided a comprehensive view and some of the earliest warning about a challenging operating environment for Ambac based on its financial status and business profile. His assessment pointed out that, Ambac would be insolvent due to insuring considerably more than the economic value of its equity capital and writing insurance contracts for risky bonds linked to troubled mortgages. Some of the major points highlighted in the article are,

  • Ambac has little capital to cover its insurance claims
  • In the consumer finance portion of Ambac's portfolio; it insured companies in financial distress with some of them reporting large scale write down on mortgage assets
  • In the base case scenario, it was estimated that the Company would report losses to the tune of USD8 billion in its structured finance, subprime RMBS and the consumer finance portfolio and it would need to raise an additional USD2 billion in order to function as an ongoing concern
  • Based on an assumption to spread the losses on the insurance of various vintage periods over the coming years, the Company would have to create a provision of USD6.8 billion as per the base case scenario
  • The economic book value per share in the optimistic scenario was estimated to be USD9 compared to the stock price of USD21.8 while writing the article
  • Out of its total mortgage-backed security (MBS) related insurance, residential mortgage-backed security (RMBS) related insurance represented 16.3%
  • Out of its total subprime portfolio, 36.4% belonged to years of 2006-2007 when credit writing standards were at their all-time lows

The predictive analysis done by BoomBustBlog was detailed and comprehensive. The prediction made by Reggie and the points highlighted by him were proved right, and in November 2010 the Company filed for bankruptcy.

 

Bloomberg

Bloomberg reported in January 2008 on downgrading of the credit rating of Ambac Financial Group by Moody’s. In the next article in January 2008, it reported that Ambac was trying to raise capital as it warned of a fourth-quarter loss in FY09.

In November 2010, it reported that Ambac filed for bankruptcy.

Bloomberg pointed out that Ambac faltered after it started chasing higher profits by expanding beyond municipal bond insurance and insuring riskier debt. That move backfired due to the crash in the housing market, and tightening of credit markets.

Bloomberg also reported that Ambac could not raise the needed capital and was unable to reach an agreement with senior bondholders for restructuring.

Reggie had pointed out in his article that Ambac Financial Group Inc. was insuring much more than they can handle in the case of an outlier event given its relatively lower equity capital - and he did this a full three months in advance. It would need to raise an additional USD2 billion to continue as a going concern.

The Wall Street Journal

In its first article published in January 2008, the Wall Street Journal (WSJ) reported that Moody's Investors Service and Standard & Poor's signaled fresh consideration of AAA rating bonds of Ambac Financial Group Inc.  

In November 2010, WSJ reported that Ambac might file for bankruptcy protection by the end of the year. In the same month, it reported that Ambac filed for Chapter 11 bankruptcy protection after the Internal Revenue Service questioned the accounting that allowed the bond insurer to receive more than USD700 million in tax refunds.

Reuters

Reuters reported in its article published in January 2008 about the downgrading of credit rating of Ambac by Fitch. Reuters pointed out that the credit rating was downgraded as Ambac dropped its plan to issue new equity after writing down repackaged consumer debt hit by the subprime mortgage crisis.

Reuters published an article in June 2010, stating the concern of Ambac about the prospect of a default on its loan obligations and was still considering filing for bankruptcy. In November 2010, Reuters reported that Ambac filed for bankruptcy. It pointed out insuring risky debt as the primary reason for the bankruptcy of Ambac.

Notably, Reggie Middleton, in his article in BoomBustBlog, has provided a detailed description of the subprime portfolio of Ambac. He pointed out that the subprime RMBS portfolio represented about 16% of the total MBS portfolio of Ambac Financial Group.

 

Financial Times

In an article published in November 2007, Financial Times reported that Ambac was working on deals to offload risks from parts of its portfolio to ease pressure on its capital base and avoid a downgrade of its credit rating.

In March 2010, Financial Times reported that the insurance unit of Ambac Financial Group was seized by regulators to halt pay-outs on USD35 billion worth of policies covering defaulted mortgage-backed debts. It was done in part to protect the public finance market guarantees from the fallout of the mortgage business. In November 2010, an article was published in Financial Times on the concern of Ambac over a possible bankruptcy. As per Financial Times, default on the risky mortgage due to housing market collapse led to the trouble for Ambac.

Forbes

In an article published in January 2008, Forbes reported on the prospect of credit rating downgrade of Ambac after the company forecasted significantly higher-than-expected losses from insuring credit derivatives, many of them tied to subprime mortgages.

In November 2010, Forbes reported that Ambac Financial Group filed for Chapter 11 bankruptcy, after failing to reach agreements with lenders on how to repay its debt.

The New York Times

In its article published in November 2010, The New York Times reported that Ambac filed for bankruptcy protection after seeking to negotiate a plan with its biggest creditors. In its Chapter 11 petition, Ambac listed several groups of bondholders — all represented by the Bank of New York Mellon as trustee — as its largest creditors, with a total of USD1.6 billion in claims.

 

 

Whether you have seen him featured on CNBC, The Keiser Report or are interested in the world of “smart contracts,” Reggie Middleton, the “Disruptor-In-Chief” of Veritaseum, is an expert you should know.

Based in the New York area, Middleton has gone from a successful real estate investor, capitalizing on the market’s economic downturn in 2008, to predicting the fall of Bear Sterns, Lehman Brothers, and others in the years to come. Reggie Middleton has always been a step ahead of the curve, so Bitcoin.com sat down with him on where the banking industry is going with blockchain technology.

As a former banker myself, I’ve seen many parallels with the Internet’s global propagation back in the 1990’s, and how the “banksters” are struggling with the Bitcoin concept, just like they did the Internet way back when. The rhetoric and blind attacks of today show history repeating itself if memory serves me correctly. How does Reggie see this financial industry-wide plan of blockchain integration playing out? Read on.

Bitcoin.com (BC): Haven’t we been through this before with banks trying to co-opt and centralize decentralized systems? Why will this be any different than ISDN or corporate Intranets from the 90’s?

Reggie Middleton (RM): Banks and many other private companies have tried to recreate the virtues of the internet via mini, private internet-like networks called intranets. These intranets were very useful and materially increased the utility of the banks, but they all paled, considerably paled in comparison to the value, utility, and ubiquity of the public internet. Click here for more on how this model works.

BC: You speak to the bankers fairly directly. What is their endgame with private blockchains, which leads to their altcoins? Disrupting the disruptor, Bitcoin? Is the goal to simply becoming more tech savvy and cost-efficient?

RM: Most in the evening industry don’t have an endgame in regards to Bitcoin technology – at least not yet. This is because they don’t fully understand its potential. They appear to be getting most of their education on the topic from a fairly narrow, undiversified set of sources. Hence, any potential misconceptions, biases or downright errors are easily reply ingrained, multiplied and propagated. If this continues for any meaningful amount of time, the re-education can be and likely will be quite painful if not lethal to the less light of foot.

"“Many of the bankers I’ve spoken to eschew Bitcoin and other ‘digital currencies’ […] don’t realize that the private blockchains use altcoins, the very same concept that they are eschewing in Bitcoin and cryptocurrencies.”

For instance, you mentioned altcoins. Many of the bankers I’ve spoken to eschew Bitcoin and other “digital currencies” (failing to realize that most USD and EUR are digital currencies, what they mean is crypto-currencies) don’t realize that the private blockchains use altcoins, the very same concept that they are eschewing in Bitcoin and cryptocurrencies. Worse yet, of all the cryptocurrencies in existence to date, Bitcoin is by far the most vetted. I feel many banks and bankers hear the hype and jump on the bandwagon without doing their due diligence. Time will tell if I’m correct in this assumption.

BC: Do you feel a small-medium sized banks will adopt decentralized digital currencies as a whole? And will this calculated breaking off from the establishment herd drive the industry in a new direction of Bitcoin inclusion?

RM: I think that either a relatively small or underprivileged bank will figure out how this stuff works (“Network effect” and all) and set off a chaotic chain reaction that will tear legacy business models asunder. There’s about a 30% chance of that outcome, in my opinion. The more likely outcome is a technology-oriented concern engineers this tech to disintermediate the banks to the extent that they’ll be rendered mere money pipe utilities needed for their banking charters (say a 60% chance of this outcome). The least likely outcome is the legacy banking industry gets it right, which has never happened before during any major paradigm shift, so leave a 10% chance for this. Click here for more on this.

BC: Do you think banks will make viable blockchains at all? Who says they can model Bitcoin’s success for their private gain?

RM: Banks will make private blockchains whether they will be viable or not is not only up for debate but also highly relative. If what you mean by viable is “Will it work?” Then I’d say yes. Now, if you mean by viable is “Will it be competitive with a widely accepted public blockchain?” then the answer is almost definitely no. You see, “Network effects” prevent private blockchains from ever scaling to the prospective heights of a widely accepted public blockchain such as bitcoin. Click here for more on this.

"‘Network effects’ prevent private blockchains from ever scaling to the prospective heights of a widely accepted public blockchain such as bitcoin.”

BC: Can banks have it both ways? Deriding the bitcoin digital currency while praising its technological foundation? Is this genius, or basic hypocrisy?

RM: Attempting to laud the blockchain while deriding tokens that make them work is neither genius nor hypocrisy. In my opinion, it’s ignorance. Picture me saying, “ I love this Internet thing, but want nothing to do with Internet packets. Unfortunately, only nerds will get that one. For more on this, go here.

BC: Was Jamie Dimon right? Will the government, or some higher power, prevent Bitcoin from going viral in the mainstream, at least in Western civilization?

RM: Jamie Dimon is talking “his book.” He’s talking like a bank CEO, who is expected to say pro-bank things, and slam things that will compete with bank offerings. He’s simply doing his job. Now, please remain cognizant of the fact that this does not mean that he necessarily knows what he’s talking about, nor is he necessarily speaking the truth.

"If bitcoin is outlawed, one risks driving it underground. Governments don’t want tech that they can’t control nor stop driven out of its reach.”

The fact that the US, the world’s most powerful financial concern, has not banned bitcoin should tell you something. If bitcoin is outlawed, one risks driving it underground. Governments don’t want tech that they can’t control nor stop driven out of its reach. That is exactly what will happen if it goes underground as a peer to peer system. Think of how successful the MPAA, the record industry, and the courts have been in stemming the use of peer to peer file sharing of MP3s after their massive legal assault? Hint: over 60% of download Internet traffic is thought to be P2P torrent-style downloads.

The can easily happen to the banking industry. The path of least resistance is to regulate and then attempt to co-opt Bitcoin (think IRS and NSA) then to outlaw and attack outright.

As for his opinion on virality, methinks he may be missing the point? Viral outbreaks are never, never anticipated, wanted nor prevented by those who are subject to it! That’s not a matter of choice!

BC: Please sum up banking, blockchains, and privatization for us. Is this a net-positive for the Bitcoin community just based on the publicity alone?

RM: My summation will likely be different from what you’d expect. I believe that the entire banking community and many of the entities that are serving them are headed in the wrong direction, re Bitcoin technology. Everybody is reaching for the low hanging fruit, totally disregarding why said fruit is hanging low in the first place (hint: it’s fully ripened and is about to drop off the vine). Very wide area networks (vWANs, such as the Internet) were designed to be used by as many entities as possible (not a select group).

This is where the network effect comes into play, and how a publicly accepted Bitcoin network will force banks to play ball in its arena or face extinction. You see, Bitcoin not only enables autonomous activities, but it also rewards them. The legacy banking business model, as we know it today, is predicated on a heteronomous business model. So was the music industry before the Internet. How did that work out for them?

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