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Boombustblog

Boombustblog (4)

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.

 

 

The Asset Securitization Crisis of the US and much of the developed and emerging markets (2007-2009) apparently ended for many relatively quickly, despite being the worst economic downturn the country (and most likely the world) has seen since the Great Depression. How did the US pull out so fast, or more importantly, did the US actually pull out of it at all? Well, it was never my belief that the problem was over, simply papered over with some accounting changes and force fed massive amounts of liquidity coupled with a drive to privatize profits while socializing losses. Of course, the natural result of such actions was the gorging of the public sector on debt and bad assets. This sleight of hand was able to create a positive GDP print in many countries while rescuing sub par private companies that would have toppled under less generate corporate welfare, but more importantly, it succeeded in poisoning several governments whose finances could not handle the extra burden of unrestrained spending during economic boom times combined with the assumption of massive private sector losses during the "bust" times.

Thus the Asset Securitization Crisis has been morphed, through direct and explicit government and central banker intervention, into a Pan-European Sovereign Debt Crisis, Soon to be the Global Sovereign Debt Crisis. This particular environment have been custom-made for my proprietary investment style, see "The Great Global Macro Experiment, Revisited".

Understanding my proprietary investment style

My own, personal and discretionary investment style leverages long and short positions in any traditional or alternative asset class, in any instrument, in any market around the world with the goal of profiting from macroeconomic trends.

Basically, I attempt to profit off of the policy errors of governments and central bankers world wide. This has been a most profitable profession over the last 10 years or so, with said errors causing massive and obvious bubbles in real estate, equity and credit markets which paid those in the real estate markets handsomely. This "multi-asset bubble" culminated in what was "an easy to see coming"crash that allowed both me and my subscribers to score abnormal returns on the downside as well. Back when I tabulated my results publicly, 300% and 400% returns were common place (see Sample Research & Performance), not including the equally impressive levered returns garnered during the bubble. I was able to time the exit from the real estate market 6 months before the market peak, a combination of luck, intuition and spreadsheets. This 9 year performance was dampened in the last 3 quarters of 2009, where I took a 39% loss by misjudging the timing of the effect of central bankers' policy errors (yes, they are still making big mistakes and no, this is not a bull market but a bear market rally - I was simply off about 9 months in the anticipation of the European Sovereign Debt Crisis). I wrote about this in detail in my Year End Note to BoomBustBlog Readers and Subscribers in an attempt to both put things in perspective and self-flagellate.

Click any graphic to enlarge.

Needless to say, the time to ride the bear is here again, and in a fashion that many do not appreciate for I fear the Sovereign Debt Crisis may make the Asset Securitization Crisis look like a mini-bull rally in and of itself, dwarfing the capital destroying potential of the latter in both size and scope. This brings us to the analysis below.

The PIIGS at the Center of the Global Sovereign Debt Crisis

Greece, Portugal, Ireland, Spain and Italy, collectively referred as PIIGS, are a reflection of how the developed countries, the credibility of whom have been endorsed over the years by high credit ratings and low credit spreads, are turning out to be the epicenter of sovereign risk in Europe. Huge fiscal deficit and unimaginably high levels of public debt, dragged these nations to the verge of default when the markets refused to lend money at prevailing rates against their fragile fiscal situation and structurally decaying economies. Greece, the weakest of all, has effectively defaulted on its debt obligations when it approached EU/IMF for funds (see How the US Has Perfected the Use of Economic Imperialism Through the European Union!). The support extended by the European Union was primarily to contain the contagion effect (resulting from common currency as well huge inter-country claims) which would have done greater damage and would have cost more. However, the aid extended by EU and IMF is quite insufficient as it will solve only a fraction of the liquidity problem, and even then for a short term, while the major solvency and liquidity issues over the medium-to-long term remain. Thus, the only inevitable outcome which can bring sustainability to the public finances of these countries is the restructuring of their sovereign debt.

The Sovereign Debt Restructuring

Sovereign debt restructuring can be done either by taking haircuts on the principal amounts or by extending the maturity of the debt. While the latter will result in some losses to the creditors owing to resultant reduction in Net Present Value , the losses shall be significantly lower than in case of haircuts in the principal amount. However, in the case of PIIGS, this option will solve the liquidity side of the problem rather than solvency issues. In the following model, we have estimated the haircuts on the principal amounts that might be taken to bring the sovereign debt of PIIGS to a more sustainable levels.

The restructuring of the sovereign debt of PIIGS nations, especially Greece, is likely to occur owing to, either or both, of the following reasons

Government debt ratio (Government debt as % of GDP) is at unsustainably high levels

  • Government debt levels in excess of 100% of GDP are highly unsustainable owing to the the huge re-financing risk as well as the interest rate risk. Interest expense on such a high debt level is already a huge burden on the fiscal situation; an increase in interest rates can put more pressure on the public finances of the country. Further, the country runs the risk of failure to refinance or roll-over such high level of debt in the market .
  • PIIGS have been facing tough times meeting their debt obligations (interest expense and the principal repayment) owing to increasingly expanding spreads over the perceived safe haven rate of the German bund. The liquidity crunch (pre-EU/IMF bailout announcement) that they are witnessing in the market is owing to high risk perception build due to poor public finances situation (rising primary and fiscal deficits) as well as bleak economic outlook of these countries. Subscribers should reference:
  • While the IMF/EU package will be a short term liquidity relief over the next three years, after 2013 these countries will again turn to the credit markets to finance not only the scheduled bond obligations but also repay IMF and EU loans (reference What We Know About the Pan European Bailout Thus Far). Thus, restructuring of the debt might become inevitable for PIIGS countries specially those which have debt levels in excess of 100% of GDP. Out of the PIIGS countries, Greece and Italy already have government debt in excess of 100% of GDP while Ireland and Portugal are rapidly approaching those levels. Greece in particular has unsustainably high debt ratios which are estimated to spiral from 116% of GDP to 140-145% of GDP in 2013

Increase in government debt ratio (Government debt as % of GDP)  is unsustainable

  • Increases in government debt ratios stem primarily from the "snowball effect" and the primary deficit. The snowball effect is the self-reinforcing effect of debt accumulation arising from the spread between the interest rate paid on public debt and the nominal growth rate of the national economy. If the average interest rate paid on existing public debt is higher than the nominal GDP growth rate, it will result in increase in government debt ratio (Government debt as % of GDP).
  • PIIGS are recording huge primary deficits, i.e, government expenditures (excluding interest expenditure) exceeding government revenues, which are leading to additional borrowing that then adds to the government debt levels - wash, rinse, repeat... This coupled with the snowball effect, which itself increased substantially due to negative nominal GDP growth and rising interest rates, has been contributing substantially to the increase in the government debt ratios of these countries. In the case of Greece, this effect has been extremely large owing to very high government debt, rising borrowing cost and the shrinking economy.

The BoomBustBlog Haircut Model

Below is a live spreadsheet summary, currently updated by our analysts with new developments and refinements, that calculates the expected haircuts in several of the PIIGS members, followed by a much more comprehensive sheet for our professional subscribers.

Bloomberg has as a headline: Greek Quarantine Tested as Spain Vows to Combat Euro Contagion `Madness':

Investors are already testing the euro region’s efforts to contain the Greek crisis.

Greek bond yields rose yesterday above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.

The equity destroying capability of this occurrence should not be underestimated. Referencing " How Greece Killed Its Own Banks!", you can see that at just 10x leverage (about 1/3rd what most European banks are currently sporting), any holder of Greek bonds are underwater (if not insolvent) on those particular purchases at offer - and that is using last weeks numbers, which look much better than the reality today!

European governments are hoping that Greece’s 110 billion- euro bailout will stop a crisis that Nobel Prize-winning economist Joseph Stiglitz says threatens the currency’s survival. Investors are speculating that Spain and Portugal may also eventually need assistance, prompting Spanish Prime Minister Jose Luis Rodriguez Zapatero to dismiss such talk as “complete madness.”...

Well, I don't know about complete madness. An excerpted page from our  Spain public finances projections shows Mr. Zapatero's government has been most optimistic in his assumptions of growth and revenues.

What dismissal of the debate of a Spanish bailout itself skirting the perimeters of "madness" is that despite the fact that Spain's government has pretty much based their numbers using L-La Land math, the baseline numbers that we compared them to are also prone to optimistic fantasy. Reference how rosy the outlook of the IMF and the EU were in forecasting the deficit and debt to GDP ration for teh UK, Ireland, Italy and Greece throughout this entire fiasco in "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!"

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revised their forecasts to still end up wildly optimistic.

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad…

Revisions-R-US!

and the EU on goverment balance??? Way, way, way off.

So, Mr. Zapatero, the contents of this blog post alone, contains more than enough reason to speculate on the possibility of Spain needing a bailout. If one were to actually delve deeper into our reports, many, many more reasons to speculate will emerge, and the banks contained in the Leveraged European Entities from a Sovereign Risk Perspective are justifiably suspect, for they hold a lot of debt and exposure to the most suspect of the PIIGS group. I don't think "madness" would accurately describe the speculation of Spain's need for assistance. The options market agrees, looking at the performance of the puts on exposed and high NPA Spanish banks...

Bonds Tumble

That didn’t stop a sell-off in Spanish bonds yesterday. The extra yield that investors demand to buy its debt over German bunds rose 21 basis points to a 14-month high of 117.8 points. Spain’s benchmark IBEX Index, the euro region’s worst performer after Greece, fell 5.4 percent to the lowest since July. Portugal’s spread rose 40 basis points to 247 yesterday.

Up until last week Spanish bonds did not represent drastic losses to their investors. I fear they will soon start looking like those Greek bonds charted above very soon, though.

The euro weakened 1.4 percent to $1.3011, the lowest in more than a year. The currency retreated further in Asian trading today, to $1.2961 as of 11 a.m. in Singapore.

Greek unions plan their third general strike of the year today after workers occupied the Acropolis yesterday and shut down schools and hospitals at the start of a 48-hour walk-out. Aegean Airlines SA, a Greek carrier, has canceled all flights....

Massive’ Protest

“We will continue with action as long as these measures, which go against workers and are anti-social, continue to be demanded,” Stathis Anestis, a spokesman for the GSEE union, said in a telephone interview, predicting “massive participation.”

The yield on Greece’s 10-year bond climbed 90 basis points to 9.84 percent yesterday, compared with 9.343 percent on April 30.

Investors may turn to the relative attraction of Asia’s bonds because economic expansion in the region means sovereign balance sheets are stronger, according to Standard & Poor’s. “The growth story and sovereign-balance story in Asia looks relatively better, much better in some cases,” William Hess, director of sovereign ratings for S&P in Asia, said in an interview this week in Tashkent, Uzbekistan.

This is reminiscent of HPA (perpetual housing price appreciation) that was used in the rating agency housing models to justify AAA ratings for junk subprime bond debt. Asia (China and Japan in particular) is in the same NPA/debt boat as Europe and the US. China has simply super-stimulated their economy and we are are awaiting the results of massive bubble blowing. Reference:

  • A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis
  • What Are the Odds That China Will Follow 1920's US and 1980's Japan?
  • Signs of a China Credit and Real Asset Bubble Are Now Unmistakable!
  • Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  • Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let's Look at the Facts
  • The Potential Effects of Remnibi Appreciation on China's Economy

More than 51 percent of Greeks said they won’t accept new austerity measures before the rescue deal, according to a poll of 1,000 people by ALCO for Proto Thema newspaper. That compared with 33 percent who would accept them. No margin of error was given for the poll conducted from April 27 to April 29.

Union Record

Unions have had some success influencing policy in the past. They forced then-Prime Minister Costas Simitis to dilute proposals such as raising the retirement age in 2001. Unions successfully opposed a government proposal in 1985 to cut spending and boost tax revenue, prompting Simitis, who was economy minister at the time, to resign two years later.

This is the reason why a simple extrapolation of foreign claims against and withing the PIIGS will fail to tell you who's next after Greece. While an examination of foreign claims reveals a lot, it fails to tell the whole story.

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical breakdown of the total exposure as well as the level of risk surrounding each component. These components include a) government default b) private sector default and c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors. Hence, the origin of our Sovereign Contagion model ( Sovereign Contagion Model – Retail and  Sovereign Contagion Model – Pro & Institutional) which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.And not, back to the article...

Some economists say the terms are too harsh for the country to bear. Greece expects its economy to shrink 4 percent this year and 2.6 percent in 2011.

“The economic pain that such belt tightening will bring suggests that it would be unwise to rule out a default further down the line,” Ben May, an economist at Capital Economics in London, said in a note.

The danger for the euro region is that failure to end the Greece crisis after three months of wrangling by EU leaders will prompt investors to shift attention to the deficits of Portugal and Spain, and dump their bonds too. Spain’s budget gap was the area’s third highest last year, at 11.2 percent of GDP. Portugal’s shortfall was fourth at 9.4 percent of output.

 

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