It’s predictable that embattled Ambac CEO Michael Callen would claim that all is well at the bond insurer in the face of considerable evidence to the contrary in the form of first quarter net loss of $1.66 billion, which wiped out last month’s highly dilutive capital raise of $1.5 billion. Ambac had to triple its common shares last go-round to raise money that was now clearly inadequate to strengthen its balance sheet, as the rating agencies demanded.
Consider further: there is no new business for the monoliines. They’ve sworn off the securitized credit market, and with rating agencies re-doing their grading scales for municipalities, that low-risk credit arbitrage is gone.
It gets even better: Goldman predicts that Ambac and MBIA each need to raise $3.4 billion more in capital. How, pray tell, and at what cost?
Despite these rather uncomfortable facts, Callen asserts that the ratings are “solid’. Fitch doesn’t think so and already downgraded Ambac to AA. Rating agency Egan Jones doesn’t think so and has been a long-time critic of the bond guarantors. The credit default swaps market doesn’t think so. Even New York State insurance superintendent Eric Dinallo has doubts.
And the last time I recall a company saying its liquidity was fine was Bear, and at least at the time of its crunch, Bear’s long-term prospects looked better than Ambacs’ do (there is still ample debate as to whether Bear was insolvent or not: the answer in most cases depends on one’s view of the credit default swaps market).
While Lehman made similar assertions, they took some steps to assuage worries, like securing bigger bank credit lines. And Lehman was in the fortunate position of having its crisis of confidence at the time of the Bear failure. The Fed simply was not gong to let two institutions go into crisis in such close succession if there was anything it could do to prevent it.
But the old dynamic still prevails: despite widespread skepticism about the Moody’s and S&P AAA ratings on MBIA and Ambac, the two rating agencies will continue to be loath to downgrade until the evidence becomes overwhelming. So the monolines will limp along until it becomes impossible not to put them out of their misery.
So take this Bloomberg story with a handful of salt:
Ambac Financial Group Inc., the bond insurer struggling to hold on to its AAA credit rating, has no liquidity issues and the majority of its portfolio is performing well, interim Chief Executive Officer Michael Callen said.The company’s credit ratings “are solid,” Callen said in a Bloomberg Television interview from New York today.
The world’s second-largest bond insurer, has been “very aggressive” in addressing its losses and will likely exceed ratings companies’ capital targets by May, Callen said. Ambac in March sold $1.5 billion in stock and equity units after more than $5 billion of charges on its guarantees of mortgage-liked debt.
Ambac and larger competitor MBIA Inc. may need to raise more capital, New York Insurance Department Superintendent Eric Dinallo said in a Bloomberg Television interview earlier today.
“It’s not time for a victory lap,” Dinallo said. “Mortgage losses and defaults will drive whether capital is ultimately OK.”
Goldman Sachs Group Inc. analyst James Fotheringham estimates New York-based Ambac and Armonk, New York-based MBIA may need to raise $3.4 billion each to fill capital shortfalls…..
Ambac’s March stock offering was enough to persuade Moody’s Investors Service and Standard & Poor’s to take the AAA bond insurer rating off review, averting a downgrade that would have crippled the company’s ability to guarantee bonds. It also removed the broader threat of losses for the $524 billion of municipal and asset-backed debt the company insures.
Bond insurers have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent at the highest rate since 1985. Ambac’s new business slumped 87 percent last quarter after ratings companies threatened to strip the insurer of its AAA status.
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Just a shame. A travesty. In the end the Fed may need to nationalize Ambac or subsidize a purchase by BerkshireHathaway. I think those are the most viable options. It does not change the fact that the ratings are just bogus and the business model is dead in the current form.