Credit Market Woes Du Jour: Ambac Losses, 95% Fall in Earnings at BofA

If you had any doubts that credit market problems were a big part of the equity market panic of this week, a further reminder came this morning.

As reported by Reuters, earnings at the Charlotte bank fell 95% due to over $7 billion in writedowns and reserves for losses. Earnings were 5 cents a share, when analysts had forecast 19 cents. The stock was down $1.97 in pre-opening trading to $34. The breakdown of the losses is not pretty:

Results reflected $5.44 billion of trading losses, compared with a year-earlier profit of $460 million. This reflected a $5.28 billion write-down related to collateralized debt obligations, which the bank said reduced trading profit by $4.5 billion and other income by about $750 million.

Bank of America also set aside $1.74 billion for credit losses, including a $1.33 billion addition to reserves. It also incurred $800 million of losses and write-downs to help some money market mutual funds exposed to risky debt maintain the $1 per share net asset value that all such funds try to keep

Bloomberg provides the latest detail on the Ambac front. The bond insurer reported an over $3 billion quarterly loss and claims to be talking to “a number” of potential saviors, um, partners:

Ambac Financial Group Inc., the first bond insurer to be stripped of its AAA credit rating, reported its biggest-ever loss and said it is talking to “a number of potential parties” to help overcome a slump in the value of subprime-mortgage securities it guarantees.

The second-largest bond insurer posted a $3.26 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion, according to a statement by the New York-based company today.

Ambac said stockholders and ratings companies are “underestimating” the company’s ability to weather the rout in credit markets. Ambac, an underwriter of $556 billion of municipal and structured finance debt, last week scrapped a $1 billion equity sale after a 71 percent drop in the stock and the departure of its chief executive officer, prompting Fitch Ratings to reduce its insurance rating to AA from AAA.

“We’re in the ultimate crisis of confidence at this point,” John Giordano, a credit analyst at BlueMountain Capital Management in New York, said before the announcement. BlueMountain manages $4.8 billion.

The fourth-quarter net loss, which equated to $31.85 a share, took the 2007 deficit to $3.23 billion, the company’s first ever annual loss. Ambac on Jan. 16 forecast a fourth- quarter net loss of about $32.83 a share.

The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records…..

Ambac’s loss reported today followed the company’s first- ever loss in the third quarter. Before 2007, Ambac had reported profit increases every year for the past decade.

“In retrospect, insurers wish they’d never heard the term structured finance, much less written the business,” said Donald Light, an insurance analyst at Celent, a consulting firm in Boston.

Ambac was unchanged at $6.20 in early New York Stock Exchange composite trading after the U.S. Federal Reserve lowered interest rates in an emergency move. The stock has tumbled 93 percent in the past year, shaving $8.8 billion from the company’s market capitalization.

The company’s 6.15 percent bonds due in 2037 plunged as much as 25 cents last week to 35.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield soared to 17.6 percent and the extra yield investors demanded over government securities widened to 13.4 percentage points.

Prices for credit-default swaps that pay investors if Ambac can’t meet its debt obligations imply a 72 percent chance it will default in the next five years, according to a JPMorgan Chase & Co.

Contracts on Ambac traded at 26.5 percent upfront and 5 percent a year last week, prices from CMA Datavision show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The market slump and scrutiny by credit-rating companies are “underestimating Ambac’s strengths and future potential,” Callen said in the statement. “At the same time, we would expect that over the longer-term, as the market normalizes and perceptions correspond more closely to reality, the market will more accurately assess our assets and strengths.”

Moody’s Investors Service and Standard & Poor’s, the two largest ratings companies, are reviewing Ambac’s ratings for a possible reduction.’

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  1. Anonymous

    What amazes me is the casino-like insanity where the US market just has to be gamed and made out to look like its a great deal or a great value and that this is an opportunity. This is an opprtunity for daytrader fools, but the stories we read about like this one of Ambac & BOA are profound and the core fundamentals of this financial system are very suspect and with a massive rate cut sent in to help banking friends from banking friends is fraud squared, it is the gas on the BBQ and the denial here is amazing, all the name of getting the casino back up and running within days, as if $15 Trillion in global decay within a few months is not something to consider! Some may not like my comment, but this is retarded and iy seems like we have a mafia in place that has no other vision than to window dress a casino that has almost burned to the ground.

    The market is still overvalued in my opinion and I think this “business cycle” of corrupt collusion needs to dramatically slow down and then take a year to consolidate and then be re-built with more regulation and people that will demand collateral and evidence to make our financial system stronger, not weaker! What is a rate cut going to do or a few hundred bucks, this is stupid!

    S&P 500 Index. $SPX (INDEX) 1,325.19

    change:-8.06 -0.60%$spx

    S&P 500 P/E: = 16.83 E/P = 5.94176%

    10 year Treasury @ 3.648%

    S&P 500 Overvalued by 2.29376% (for fair value)

    S&P 500 Fair Value for Tuesday = 1294

  2. Anonymous

    Check this out in terms of why The Fed is not putting out the economic implosion:

    This fire has been burning out of control for 8 years and the Iraq war continues to consume GDP wealth, but the Fed is faced with allocation of resources (supply and demand) relating to less cash flow and thus an inability to fight multiple battles in the form of multiple interconnected economic bubbles — like a housing crash, inflationary increases, stock value declines, and dynamic variables that are impacting the resources available for them to put out any of these related fires.

    I think we have had years of un-precedented financial collusion where synthetic derivatives were packaged into a tsunami of un-precedented dis-proportional easy global credit allowances which were universally abused, resulting in the current financial chaos and systemic crisis — which I think is symbolic of an out of control fire. The fire needs time to burn out, the market needs to correct and the more casino/lotto theories embarked upon by government intervention will only add more fuel for this fire!

    I feel better now, Yah!

  3. Anonymous

    Interesting background on underwriting:

    Delegated Underwriting and GSE Automated Underwriting Approvals.

    underwriting is a program under which approved lenders are allowed to commit
    MGIC to insure loans originated through the flow channel utilizing their own
    underwriting guidelines and underwriting evaluation. Some major lenders having
    delegated underwriting authority use their own proprietary automated
    underwriting services to apply their underwriting guidelines to loans. In
    addition, since 2000, loans approved by the automated underwriting services of
    the GSEs have been automatically approved for MGIC mortgage insurance.

    During 2003, a substantial majority of the loans insured by MGIC through
    the flow channel were approved as a result of loan approvals by the automated
    underwriting services of the GSEs or though delegated underwriting programs,
    including those utilizing proprietary underwriting services. MGIC expects the
    portion of its flow business that is approved in this manner to continue to
    increase. The loan approval criteria of automated underwriting services are
    within the risk management discretion and control of the GSEs or the lender
    operating the service. As a result of accepting the loan approval decisions of
    these services, MGIC does not have the ability to control in advance the risk
    characteristics of such loans. MGIC’s risk management approach to such flow
    business has been to monitor periodically the credit quality of the loans it has
    recently insured in this manner. If as a result of such review MGIC perceives
    certain loans insured in this manner have an unacceptably higher risk of claim,
    MGIC can continue to insure loans with such characteristics that are thereafter
    submitted to it at A- rates. In addition, in the case of loans approved other
    than through the automated underwriting systems of the GSEs, MGIC can decline to
    continue to insure loans having such characteristics.

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