Ambac Deal Hits Snag, MBIA writing “Very Little” New Business
Posted in Ambac, mbia on February 29, 2008 by Chris McCannAmbac Deal Hits Snag, MBIA writing “Very Little” New Business
CNBC is reporting Ambac Deal Hits Snag Regarding Raters’ Capital Demands.
CNBC’s Charlie Gasparino did not take to the air at the appointed 3:30 p.m. EDT to declare an impending deal to bail out Ambac. Breaking news? Broken record news might be more like it.
Intoned Charlie at 7:42 a.m. this very morning:
“The bailout of troubled bond insurer Ambac has hit a significant snag, after rating agencies demanded more capital from the consortium of banks involved in the bailout effort, CNBC has learned.
People close to the deal are confident that it will still happen, because the banks and the rating agencies are aware that, if it collapses, there will be a huge decline in the stock market.”
So apparently, the rescue deal (whichever one we are talking about now) hit snags. But guess what? It might still happen, so let’s revisit just how often he’s oversold this story.
Dow Jones Had This Take
Ambac Financial Group Inc. (ABK) hit a “significant snag” Wednesday in its restructuring effort, CNBC’s Charlie Gasparino reported Friday.
At issue is a disparity between how much money a bank consortium is willing to invest in the troubled bond insurer and how much capital cushion ratings agencies require to maintain the company’s rating given a structure that would separate the municipal bond insurance from the collateralized debt obligations.
The consortium banks and Ambac are devising a new proposal to present to the ratings agencies, Gasparino said, “citing people close to the deal.”
He added that talks are ongoing and the deal is not dead.
Translation: The Deal Is Dead Or Irrelevant
This is just one of several significant “snag” that await the monolines. Even if Ambac is funded with “sufficient capital” to meet the non-existent requirements of Moody’s, Fitch, and the S&P (See MBIA Maintains Highest Rating, Pfizer Cut), the one certainty is that still more funding will will be required down the road.
After all, who wants to buy insurance from Ambac or MBIA with the CDO cloud hanging over their heads, when insurance could instead be bought from Warren Buffett instead?
Little New Business
Bloomberg is reporting MBIA Writing `Very Little’ New Business Amid Scrutiny.
MBIA Inc. is writing “very little” new bond insurance business as borrowers balk at buying a guarantee from a money-losing company without stable AAA credit ratings.
MBIA, whose ratings were under scrutiny by Moody’s Investors Service and Standard & Poor’s for more than three months, said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.
“The demand for our product is the lowest it has been, and we are writing very little new business,” the company said in a filing today with the U.S. Securities and Exchange Commission.
Credit-default swaps tied to MBIA’s debt jumped 106 basis points to 705 basis points, according to London-based CMA Datavision, a signal of eroding investor confidence in the company’s creditworthiness. Contracts on its insurance unit, which investors and banks have been using to hedge against the risk the company loses its top ratings, rose 77 basis points to 505, CMA prices show.
It’s Time To End The Pretending
While Moody’s, Fitch, and the S&P all pretend that the guarantees of the monolines are worth something, the CDS market and the insurance buyers believe otherwise. Has there ever been an AAA rated company in history with swaps trading over 700?
Wishin’ and Hopin’ and Pretendin’ will not turn a cow chip into a gold eagle. And the longer the ratings agencies live in Bizarro World, the more instability there will be in the system. It’s time to end the pretending.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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MBIA Writing `Very Little’ New Business
Posted in mbia on February 29, 2008 by Chris McCannMBIA Writing `Very Little’ New Business
From Bloomberg: MBIA Writing `Very Little’ New Business Amid Scrutiny
MBIA Inc. is writing “very little” new bond insurance business as borrowers balk at buying a guarantee from a money-losing company without stable AAA credit ratings.
MBIA, whose AAA ratings were under scrutiny by Moody’s Investors Service and Standard & Poor’s until this week, said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.
From the MBIA SEC from 10-K.
In the fourth quarter of 2007, the Company observed deterioration in the performance of several of its prime and near prime home equity transactions and established $614 million of case basis reserves for future payments. During the fourth quarter of 2007, the Company paid $44 million in claims, net of reinsurance, on seven credits in this sector. Additionally, in the fourth quarter of 2007, the Company established $200 million of non-specific unallocated loss reserves to reflect MBIA’s estimate of probable losses as a result of the adverse developments in the residential mortgage market related to prime, second-lien mortgage exposure, but which have not yet been specifically identified to individual policies. The Company expects that loss payments on its prime, second-lien mortgage exposure during 2008 will amount to a significant portion of its current reserves for such exposure.
MBIA has Questions, Cancels Dividend, CEO Feels Pinched
Posted in CDOs, mbia on February 26, 2008 by Chris McCannMBIA has Questions, Cancels Dividend, CEO Feels Pinched
CNNMoney is reporting MBIA eliminates quarterly dividend, saving $174M annually.
MBIA Inc. (MBI) said late Monday its board voted to eliminate its quarterly dividend. The Armonk, N.Y.-based bond insurer said the elimination will save roughly $174 million annually, which is the amount that the company paid out in dividends in 2007.
MBIA said the action was taken at the recommendation of Chairman and Chief Executive Jay Brown ‘to further strengthen the company’s financial resources and to increase its operating flexibility.’ The dividend was reduced on Jan. 9 to 13 cents, although no dividends were paid out at that rate.
MBIA added that its board also voted to move to an annual dividend evaluation in the first quarter of each year.
‘MBIA will continue to take reasonable and prudent actions such as this dividend elimination in an effort to retain and strengthen our Triple-A ratings,’ said Brown in a statement. ‘As a very large individual shareholder of MBIA, I’m the first one to feel the pinch from this action.
But I think this, coupled with my recent commitment to buy a substantial number of additional shares, demonstrates my absolute commitment to be aligned with our owners and to maximize long-term value.’
CEO First One To Feel Pinch
I am sure everyone feels sorry for Mr. Brown and Mr. Chaplan. Please keep them in your prayers.
I sure would hate to be pinched like that. How can they possibly get by?
Mercy!
Let’s Do The Math
In MBIA Admits $30.6 Billion CDO Exposure we saw that in addition to the $30.6 billion in worthless CDOs that it guarantees, MBIA has an additional $8.1 billion in worthless CDO squared (CDOs of CDOs) securities that it guarantees. That’s makes MBIA’s total CDO exposure $38.7 billion. And it hid that for months. It has total cash of $5.73 billion. Even if one pretends those CDOs will be worth 50% on the dollar, how does one possibly get AAA out of that mess?
Questions Galore
Inquiring minds are wondering if $38.7 billion is the total CDO exposure. What about CDS exposure? Other MBS exposure? What losses are expected? That a lot of questions. But I am not the only one with questions.
Please consider MBIA Will Halt Asset-Backed Business, Split Units.
MBIA Inc., seeking to stave off a crippling credit rating downgrade, will stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years.
Chief Executive Officer Jay Brown also said he has “questions” about the company’s 2007 preliminary results released last month and hasn’t yet signed off on the statements, according to a letter to shareholders today.
Brown said he has been reviewing the company’s 2007 financial statements, with a focus on MBIA’s loss reserves and mark-to-market losses. The markdowns reflect the difference between what MBIA charged to insure certain securities and what it could have charged based on a change in the value of the underlying security during the period.
“It is a difficult and complex task for both the internal teams and the company’s auditors to establish best estimates in the most volatile credit markets in the company’s history,” Brown wrote. “I have a few more follow-up questions that need to be answered for me to confirm the company’s preliminary results which were released a few weeks ago.”
MBIA’s ability to raise $2.6 billion was “a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company,” S&P said.
Moody’s is still reviewing MBIA and Ambac for downgrades. Fitch cut Ambac’s insurance rating to AA last month and is considering cutting MBIA. MBIA raised money through selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.
S&P estimated that MBIA may have losses of $5.5 billion before tax, eliminating its entire capital cushion.
Here’s The Deal
- MBIA hid $38.6 billion in CDO exposure for months
- MBIA Posted a loss of $1.93 billion last year
- MBIA CEO Brown will not sign off on results
- MBIA CEO Brown has questions about how big the writeoffs will be
- The S&P estimated that MBIA may have losses of $5.5 billion before tax, eliminating its entire capital cushion.
- MBIA wants to hide losses for up to 5 years, hoping nothing else blows up, and future earnings cover the losses.
Anyone who thinks those CDOs are marked to market has holes in their head. To top it all off, earlier today the S&P Sniffed Horse Hockey and Called it a Rose, by reaffirming the AAA rating of MBIA and Ambac.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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S&P Sniffs Horse Hockey, Calls It A Rose
Posted in Ambac, Bond insurance, CDOs, S&P, mbia on February 26, 2008 by Chris McCannS&P Sniffs Horse Hockey, Calls It A Rose
In a widely expected move, the S&P proved they have an iron stomach for gall and/or a nose that cannot distinguish horse hockey from a rose. Today the S&P Affirmed The AAA Rating Of Insurers MBIA, Ambac Ratings.
Standard & Poor’s reaffirmed the Triple A rating on the two biggest bond insurers, MBIA and Ambac Financial Group, sparking a rally by both stocks and the market in general. S&P ended its downgrade review for MBIA’s (MBI) Triple A rating, citing success by the largest U.S. bond insurer in raising new capital.
The action reflects the company’s ability to successfully access $2.6 billion in extra capital that can be used to pay claims, S&P said in a statement. The outlook is negative, indicating a rating cut may still be likely over the next two years.
The “AAA” ratings of Ambac (ABK) were affirmed but remain on review for downgrade. A group of banks has largely finalized a deal to recapitalize Ambac and is now trying to sell the plan to the rating agencies to save Ambac’s triple-A rating, CNBC has learned.
S&P’s affirming of Ambac doesn’t take into account the recapitalization plan, but the review will continue until details of the plan are clearer. S&P’s affirming of Ambac doesn’t take into account the recapitalization plan, but the review will continue until details of the plan are clearer.
A tentative structure for up to $3 billion in capital for Ambac has been agreed to by the consortium, which includes Citigroup (C)and Wachovia (WB). The banks are trying to save Ambac, as well as other bond insurers, because a ratings downgrade could force the banks to write down billions more of their own debt.
Citing ability to raise $3 billion in capital (a deal that is not even finalized), and in the face of monolines holding $70-$150 billion of worthless CDOs, the S&P held its nose and confirmed horse hockey smells like a rose.
Following is a recap of what I said last Friday in Ambac Bailout Hopes Excite Bulls.
Who’s Holding The Bag?
If you want to know who’s holding the bag if the monolines fail, simply look at the who’s who list of sponsors.
Who’s Who Bagholder List
- Citigroup (C)
- UBS AG (UBS)
- Royal Bank of Scotland (RBS)
- Wachovia Corp (WB)
- Barclays (BCS)
- Societe Generale SA
- BNP Paribas SA
- Dresdner Bank AG
The two key sponsors (Citigroup and UBS) were on the list of recommended shorts by Meredith Whitney. See Analyst Meredith Whitney Asks Banks “Where’s Waldo?” for more on expected bank writedowns and dividend cuts.
Some Problems Can’t Be Solved
A $2-$3 billion infusion simply cannot fix a gaping long term $70-$150 billion problem (depending on who you believe) in the monolines. Should an attempt to do so be made, I confidently predict the banks will have to go back to the well again and again to provide additional capital.
If instead the banks agree to an upfront writeoff of the entire amount of worthless CDOs in return for an equity stake, exactly where are the banks going to come up with the necessary cash? Even if they do manage to pull that off, they will have accomplished nothing but buying a business model that is slowly dying and facing competition from Buffett as well.
“Sometimes there are problems that just can’t be solved”, and this is likely one of them. Oh sure, the market may rally a bit, especially if Moody’s, Fitch, and the S&P keep their collective heads buried in the sand and reaffirm the AAA ratings on a mere $2 billion infusion, but long term the problem cannot go away until the entire package of CDOs guaranteed by the monolines is properly marked to market at a value close to zero.
What’s interesting is that Citigroup did not even rally today (It closed down 1.5%), while the S&P 500 closed up 1.25% and Ambac and MBIA closed up 16% and 20% respectively.
Insurers’ Day of Reckoning
Minyan Peter was writing about Insurers’ Day of Reckoning earlier today before this news hit. Nothing happened to change the relevance of what he had to say so let’s take a look.
A hurricane comes through your town and levels your house. A few weeks later, you receive a letter from your insurance company telling you that unless you buy some of its stock, it won’t be able to pay your insurance claim. What do you do?
As far fetched as this question may feel, this is, in principle, what’s behind the bailout of the monoline insurance companies. Unless their biggest CDS counterparties step up with more capital, the insurance companies won’t be able to make good on their CDS and the banks will be forced to take write-downs.
How this all plays out remains to be seen, but I would suggest that until additional capital comes into the financial services system from organizations other than other financial services companies, I am afraid that all that is happening is the further leveraging of an already leveraged and highly interdependent financial system.
Now there are those who suggest that creating a “good bank/bad bank” out of the insurance companies will create the opportunity for the incremental outside capital that I suggest is so much in need. And in general I would agree. Adding capital to the “good” municipal business would put that business on more solid footing. But what about the “bad” CDO business?
A review of history suggests that there was really no such thing as a good bank/bad bank strategy – only a good bank/dead bank strategy. For one to live, the other had to die. And to be clear, looking back in time, no matter how the good and bad eggs were unscrambled, the banks’ equity holders (and some holding company lenders) ultimately lost it all.
So until losses are taken, I continue to believe there is a day of reckoning to come for the monoline insurance companies. And, more sadly, I sense the same day of reckoning for those multinational banks who are stepping up to help. For rather than spreading risk beyond the financial system, it appears that every bailout effort seeks to concentrate it more and more onto the balance sheets of world’s largest banks.
And, while I truly wish it weren’t the case, because of the financial system’s interdependence, we continue to postpone the inevitable.
Raising Capital
Professor Sedacca was talking about the need to raise capital earlier today. Let’s tune in.
It now appears that most everyone agrees that most financial institutions are woefully undercapitalized and they have bloated balance sheets that have nary a clue how to value.
So what do they do? Bring on more garbage to the balance sheet via Ambac (ABK) and avoid, for a short time, marking down their other garbage? Remember back in September when Citi (C) said it was marking bonds ‘at a reasonable stab’?
Surely Citi jests.
They are shoring up money funds, allowing ARS to fail daily and, yep, raise capital. Today it is Suntrust’s (STI) turn to raise 200 million at 8% via a trust preferred.
We continue to be short credit via the preferred market as I think issuance, if anything, will crank up.
By providing precious capital to the monolines they can ill afford to lose, the banks did two things
- Threw good money after bad
- Delayed the day of reckoning
There may be some financial incentives to delay the day of reckoning, but I suspect it really makes matters worse. Here’s how: Instead of addressing the monolines today, the banks pretend they do not need to. Six months from now, the problem with the monolines is not going away. If anything it will be worse. In addition, banks are going to need to raise more capital as “walk aways” continue to add unwanted housed to balance sheets, credit card defaults rise, and commercial real estate plunges.
In the long run, the S&P did not do anyone any favors by their actions today. However, the S&P did manage to further damage their own reputation, presuming of course that was even possible, or they even care.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
MBIA Plans to Split, Cuts Dividend, Questions 2007 Results
Posted in mbia on February 26, 2008 by Chris McCannMBIA Plans to Split, Cuts Dividend, Questions 2007 Results
From Bloomberg: MBIA Plans to Split Asset-Backed, Municipal Units
MBIA Inc., … will separate its municipal unit from the asset-backed securities it guarantees within five years after posting record losses on subprime debt.
The Armonk, New York-based company will stop writing asset- backed securities guarantees for six months, new Chief Executive Officer Jay Brown said in a letter to shareholders today. Brown also said he has “questions” about the company’s 2007 preliminary results released last month and hasn’t yet signed off the statements.
…
“Everything we are working towards right now is centered on regaining stability,” Brown said in the letter. “We can expect a bumpy ride over the coming months and possibly longer.”
F1rom MBIA: MBIA Inc. Eliminates Quarterly Dividend
MBIA Inc. today announced that its Board of Directors voted to eliminate the quarterly dividend.
Split within 5 years? Why even mention it now?
Add: MBIA Issues Letter to Owners (hat tip risk capital)
MBIA Issues Letter to Owners
Posted in Bond insurance, mbia on February 26, 2008 by Chris McCann MBIA Issues Letter to Owners
Monday February 25, 5:37 pm ET
ARMONK, N.Y.–(BUSINESS WIRE)–MBIA Inc. (NYSE:MBI – News):Dear Owners:
In my first letter to you last Tuesday the 19th, I told you that I believe the structure of the financial guarantee industry needs to be changed. I said that we are looking at a number of different approaches to transform MBIA with the goal of ensuring that if we’re ever faced with an industry crisis even close to the magnitude of the one we’re experiencing today, we would be in a position to maintain our operating flexibility and manage our capital needs on a more cost effective basis. We would continue to be more than capable of honoring our obligations to all of our policyholders, as we are doing today, while continuing to write new business.
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It’s been a non-stop first week back for me, and I’m pleased to tell you that we’ve made a number of important decisions that will help guide the transformation of our business and allow us to achieve the goals that I laid out for you last week. Just last Wednesday I met with the Honorable Eric Dinallo, Superintendent of the New York State Insurance Department, and shared my vision of MBIA’s future with him. We’re in frequent and active contact with Mr. Dinallo and his team, who have been enormously supportive of our efforts. We’re indebted to them for their guidance and encouragement throughout our discussions. We are also in close contact with the rating agencies to assure that our transformation strategy achieves the highest ratings for our insurance business.
One of the points we’ve made clear in our discussions is that we will only restructure on a timeframe and in a manner that allows us to carefully consider the needs of all of our stakeholders. First among all considerations is that we will protect the interests of all of our policyholders. That is why, as soon as it’s feasible but within a five-year period, we will restructure the company in such a way as to insure public and structured finance business from separate operating entities. We have already made the decision to cease ensuring new derivative credit contracts from our insurance companies. My goal is to retain the highest ratings that we can for both our structured and public finance businesses, and I believe this can be accomplished by separating these two business lines and leaving the derivative market to the traders on Wall Street.
While we continue to evaluate our options, I have suspended the writing of all new structured finance business for approximately six months. Further, the flexibility and preservation of our capital remains a high priority for us. That is why today your board voted today to eliminate the quarterly dividend, effective immediately. This move will preserve approximately $174 million, which is the amount that the Company paid out in dividends in 2007.
I fully support this decision by the board, even though – as MBIA’s largest individual shareholder – I’m the first one to feel the pinch. But I hope you see this, along with the fact that I have never sold a share of MBIA stock or exercised any options during my previous tenure, along with my commitment to buy a substantial number of additional shares, as a demonstration of my absolute commitment to be aligned with our owners. Going forward we will declare and pay dividends on an annual, rather than quarterly basis.
In a move to level the playing field in terms of the cost of capital, we will escalate our efforts to campaign vigorously against the ability of U.S. financial guarantors to reinsure U.S. domestic financial guarantee transactions with foreign affiliates without paying U.S. corporate tax rates. As more money comes into existing and new competitors’ public finance business, the discrepancy this loophole allows becomes even more pronounced. In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with U.S. domiciled operations to operate without paying their fair share of U.S. taxes. After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient! I’ve been against this loophole for years, and discussed it in my first investor conference in 1999. I still don’t look good in Bermuda shorts but we will eventually have to move the company if the U.S. tax code is not modified.
Also related to capital outlay (and some might say significant capital outlay) is executive compensation – in particular, the compensation packages structured for our executives. Starting with me, we will ask our shareholders at our next annual meeting to vote on the restricted stock awarded to me that you saw in a recent 8K filing. Our commitment to “say on pay” is to lead rather than be compelled, and we will provide an opportunity for our owners to vote on the board’s significant decisions on executive pay beginning at the 2009 annual meeting. We’re working for you, and you should be able to tell your board if you think we’re worth what we’re being paid.
In addition to coordinating our plan going forward, I spent a good portion of the last week and weekend with our financial team reviewing our draft 2007 financial statements which will be filed in a few days. As you might expect, a significant portion of that time has been spent on the two key areas requiring both the most extensive analysis and sound judgment: loss reserves and our mark-to-market (MTM) on credit derivative transactions. If I was not already familiar with the company’s existing valuation approaches, this is all I would have been doing as it is a difficult and complex task for both the internal teams and the company’s auditors to establish best estimates in the most volatile credit markets in the company’s history. I have a few more follow-up questions that need to be answered for me to confirm the company’s preliminary results which were released a few weeks ago. That said, it is clear that the continued lack of any market valuations based on cash trades continues, and the extreme spread widening we and others are forced to rely on for valuation in the credit derivative market means we are likely to have another MTM in the first quarter. And the continued uncertainty surrounding the housing market, liquidity for refinancings, impact of the interest rate cuts and Congress’ economic stimulus legislation mean we will need to continuously review our loss reserve modeling assumptions.
Everything we are working towards right now is centered on regaining stability in these volatile times. You can find a list of the decisions and principles we’re using to guide our transformation on www.mbia.com. Make no mistake, we still have work to do, and I will keep you informed as we make progress with our plans. But the net of it is this: we know where we’re going. We’re on a path now that will allow us to achieve and deliver financial stability to our many constituents for the long term. Our path is not the same road that others in our industry are taking. For example, we were the only monoline to pursue an aggressive capital plan, and we raised over $2.6 billion in new capital and preserved over $500 million in a two-month period. Yes, we’re following our own course, but this shouldn’t surprise anyone. Our direction is consistent with actions only the industry leader could take.
But as the leading monoline, we are also a convenient and attractive target for self-interested parties such as Mr. William Ackman. Many of you have asked me in the past few days whether there is something personal between us. In actual fact we have many similarities. We are both extremely passionate in our beliefs and are persistent in overcoming all obstacles in terms of reaching our objectives. The real difference is that I am leading a regulated institution that provides security, jobs and peace of mind to tens of thousands of institutions and millions of individual investors. Mr. Ackman’s objective is less complex; he will stop at nothing to increase his already enormous personal profits as he systematically tries to destroy our franchise and our industry. His campaign against us has increased our cost of capital, but his intent to force a collapse has no chance to succeed.
The continuing uncertainty in the mortgage markets tells me that we can expect a bumpy ride over the coming months and possibly longer. I am truly thrilled to be back in the driver’s seat at MBIA, and I fully expect that together we’ll reach our goal of financial stability and long-term value in the years ahead.
As always, thank you for your continuing loyalty and confidence in our company.
| Sincerely, |
| Jay Brown |
| Chairman and CEO |
| MBIA |
S&P: MBIA Removed from CreditWatch Negative
Posted in Ambac, CIFG, FGIC, MGIC, S&P, XL Capital Assurance, XL Financial Assurance, mbia on February 26, 2008 by Chris McCannS&P: MBIA Removed from CreditWatch Negative
by From Standard & Poor’s: S&P Takes Additional Bond Insurer Rtg Actions (no link)
NEW YORK (Standard & Poor’s) Feb. 25, 2008-Standard & Poor’s Ratings Services today took rating actions on several monoline bond insurers following additional stress tests with respect to their domestic nonprime mortgage exposure.
The financial strength ratings on XL Capital Assurance Inc. (XLCA) and XL Financial Assurance Ltd. (XLFA) were lowered to ‘A-’ from ‘AAA’ and remain on CreditWatch with negative implications;
The financial strength rating on Financial Guaranty Insurance Co. (FGIC) was lowered to ‘A’ from ‘AA’ and remains on CreditWatch with developing implications;
The ‘AAA’ financial strength rating on MBIA Insurance Corp. was removed from CreditWatch and a negative outlook was assigned;
The ‘AAA’ financial strength rating on Ambac Assurance Corp. was affirmed and remains on CreditWatch with negative implications; and
The ‘AAA’ financial strength ratings on CIFG Guaranty, CIFG Europe, and CIFG Assurance North America Inc. were affirmed and retain a negative outlook.
The downgrades on XLCA, XLFA, XL Capital Assurance (UK) Ltd., and Twin Reefs Pass-Through Trust (a committed capital facility supported by, and for the benefit of, XLFA) reflect our assessment that the company’s evolving capital
plan has meaningful execution and timing risk.
The downgrades on FGIC, FGIC Corp., and Grand Central Capital Trusts I-VI (a committed capital facility supported by, and for the benefit of, FGIC) reflect
our current assessment of potential losses, which is higher than previous estimates.
The removal from CreditWatch of, and assignment of negative outlooks on, MBIA Insurance Corp., MBIA Inc., and North Castle Custodial Trusts I-VIII (a committed capital facility supported by, and for the benefit of, MBIA) reflect MBIA’s success in accessing $2.6 billion of additional claims-paying resources, which, in our view, is a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company.
Ambac Bailout Hopes Excite Bulls
Posted in Ambac, Barclays, Bond insurance, C, CDOs, Monoline Split, RBS, Societe Generale, UBS, Wachovia, downgrade, mbia on February 23, 2008 by Chris McCannAmbac Bailout Hopes Excite Bulls
Bloomberg is reporting Ambac Soars on Reports Bailout May Happen Next Week.
Ambac Financial Group Inc., the bond insurer in rescue talks with banks, soared in New York Stock Exchange trading on optimism the company may soon reach an agreement that would save its AAA credit rating and avoid losses on $556 billion of securities it guarantees.
The New York-based company rose 16 percent after CNBC Television said a deal between Ambac and its banks may be announced Feb. 25 or Feb. 26. A group of banks is preparing to inject $2 billion to $3 billion into Ambac, the Financial Times said. The money would be part of plan to split Ambac, the newspaper said.
A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guaranty units would help banks, the insurance company and municipal debt investors avoid losses. Banks stood to lose as much as $70 billion if the top rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.
Eight banks including Citigroup Inc. and UBS AG formed a group to consider providing financing, a person familiar with the matter said earlier this month. Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, were also involved, said the person, who declined to be named because details hadn’t been set.
FGIC, which lost its top rating at Moody’s Investors Service last week, asked to be split in two to protect the ratings on municipal bonds it guarantees. MBIA yesterday said all bond insurers must eventually divide their businesses.
S&P Futures Soar On The News
Volume surged way ahead of the news stories hitting mass media, spurring silly talk on message boards of the PPT. Here are a couple of charts I was watching real time.
S&P 500 3 Minute Chart
S&P 500 15 minute chart
click on chart for sharper image
More Details Emerge After Hours
After hours, additional details are emerging, mainly in the form of what the bailout might look like. MarketWatch is reporting Banks may recapitalize Ambac to save AAA rating.
A group of eight banks that are major counterparties to Ambac Financial Group may recapitalize the struggling bond insurer in a bid to save its crucial AAA rating, two people familiar with the situation said Friday.
“We have a lot of alternatives. A capital raise has always been an option to stabilize the rating,” said Vandana Sharma, a spokeswoman for Ambac. “We’re trying to do the best by all constituents, including policy-holders, shareholders and counterparties.”
Splitting up bond insurers would be difficult, pitting policyholders against shareholders of the bond insurer holding companies. “The lawyers have already begun gearing up on that one,” said Josh Rosner, a managing director at research firm Graham Fisher & Co.
One proposal involves banks injecting roughly $5 billion of capital into specific bond insurers and also providing a $10 billion line of credit.
Another idea involves commuting, or effectively tearing up, CDS contracts between banks and bond insurers. In return for dropping their claims, the banks would get a preferred equity stake in the bond insurer.
“Putting capital into an insurer is more of a contract issue between the companies involved, rather than a regulatory issue,” said James Gkonos, vice chairman of the Insurance Practice Group at law firm Saul Ewing. “That would be the simplest and most efficient way to do this.”
A forced splitting up of a bond insurer by a regulator such as the New York State Insurance Department would be an “extreme scenario” that would involve public hearings and litigation and take a long time to complete, he explained.
Still, any re-capitalization of Ambac by bank counterparties would present its own problems too, because it could dilute existing investors in the company. Such a plan would also use up capital that banks may need to help them through other problems thrown up by the global credit crunch.
“Sometimes there are problems that just can’t be solved,” Rosner said. “At some point, the market is going to realize that there is not always a best solution. There is often just a least worse solution.”
Who’s Holding The Bag?
If you want to know who’s holding the bag if the monolines fail, simply look at the who’s who list of sponsors.
Who’s Who Bagholder List
- Citigroup (C)
- UBS AG (UBS)
- Royal Bank of Scotland (RBS)
- Wachovia Corp (WB)
- Barclays (BCS)
- Societe Generale SA
- BNP Paribas SA
- Dresdner Bank AG
The two key sponsors (Citigroup and UBS) were on the list of recommended shorts by Meredith Whitney. See Analyst Meredith Whitney Asks Banks “Where’s Waldo?” for more on expected bank writedowns and dividend cuts.
Some Problems Can’t Be Solved
A $2-$3 billion infusion simply cannot fix a gaping long term $70-$150 billion problem (depending on who you believe) in the monolines. Should an attempt to do so be made, I confidently predict the banks will have to go back to the well again and again to provide additional capital.
If instead the banks agree to an upfront writeoff of the entire amount of worthless CDOs in return for an equity stake, exactly where are the banks going to come up with the necessary cash? Even if they do manage to pull that off, they will have accomplished nothing but buying a business model that is slowly dying and facing competition from Buffett as well.
“Sometimes there are problems that just can’t be solved”, and this is likely one of them. Oh sure, the market may rally a bit, especially if Moody’s, Fitch, and the S&P keep their collective heads buried in the sand and reaffirm the AAA ratings on a mere $2 billion infusion, but long term the problem cannot go away until the entire package of CDOs guaranteed by the monolines is properly marked to market at a value close to zero.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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CNBC: Ambac Rescue Could Come Next Week
Posted in Ambac, cNBC, downgrade on February 22, 2008 by Chris McCannCNBC: Ambac Rescue Could Come Next Week
UPDATE: The Financial Times is reporting that the banks most exposed to a downgrade are discussing injecting more capital into Ambac, and that the plan includes splitting the company.
From the Finanical Times: Banks look to bolster Ambac with $2bn
A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.
The money from the banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.
From Reuters: Ambac rescue could be announced Mon or Tues: report Banks rescuing Ambac … could announce a plan as soon as Monday or Tuesday, CNBC’s Charles Gasparino said on Friday.
The details of the deal are still being worked out and the plan may fall through
