Ambac Comments on Recent Moody’s Report
Submitted by
CalculatedRisk on Thu, 01/17/2008 - 6:49am (53 comments)
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First?
Haloscan says "No comment!"
I guess that's the only sensible reaction!
PS: 1st?
But even worse, they bought CDS protection against defaults by the counterparties.
There is no party in counterparty
"We're All Counters Now."
There is no party in counterparty
Could somebody explain this to me ... please?
And Atrios sez: Ambac and MBIA are the two Jenga pieces which will pull the whole shitpile down. They insure all of the shitpile, allowing everyone to pretend that all of the risky stuff they own isn't risky at all. But that insurance is most likely a complete fantasy as it seems Ambac and MBIA don't have the cash to pay out claims. I should've gotten into the bond insurance business. Lower their ratings, you destroy their businesses. More than that, you wipe out the insurance fantasy, forcing everyone who insured with them to admit they have all this risky stuff on the books. Recognizing, of course, that in this context "risky" is just a euphemism for "shitty."
I think "surprising" is a poor word choice.
Who is Brian? I never see him post anything...
Shouldn't the bond insurers buy insurance from each other? That would be a cash-neutral move and the ratings of the insurance they sell to others would then improve.
Kinda like magic. Just kidding of course.
Off topic, but Bernanke is speaking and the markets are dropping. Coincidence?
Blogenfreude, the meaning of that cryptic "There is no party in counterparty" is that there is no entity which has the money to pay out on the claims. The game with this stuff was always that it was a step function. You'd get minimal losses until the chain letter RE game finally reached the breaking point, and then you'd get a whole sudden mass of them.
What I find entertaining is that the first-half 2007 stuff is the worst yet.
Anonymous | 01.17.08 - 10:31 am | #
Maybe because Dr. Ben has been prescribing pain narcotics for the market's diabetes and heart ailments?
probert, a friend who sends me stuff - just like many other people. He is on many of the conference calls, so he send me his notes.
blogenfreude, "No party in counterparty" is a play on words. Merrill hedged some positions with ACA (the counterparty to the hedge), but when the position went bad and Merrill called up ACA to pay off - oops, no money. There was no counterparty to the hedge!
This is the same concern (but larger) for MBIA and Ambac.
Best to all.
knock knock.
who's there?
Ambac
you're back where?
here. remember? you said i could have a billion dollars?
oh. it's you. no, that's not going to happen anymore.
come on! give me some capital, dammit!
Another day, another writedown/loss/outrage. We'll know we've hit bottom when the Chinese start buying in earnest.
CR,
From the prevoius post but appears related; They [Merrill] have $13B of notional credit default swaps with AAA (for now) rated Financial Guarantors there is a chart which lays out adjustments that I dont understand. There is a foot not that says they have bought $2B of CDS on the Financial Guarantors themselves.
First when you say you don't understand I get nervous. Second when you are exposed to insured losses like this haven't you essentially bought anti-insurance? I mean you pay for insurance and then insure it yourself with that $2b but if the insurance vehicle is insolvent then you get nothing and lose your $2b. Or perhaps I have it all wrong.
Ambac's common is down over 50% on the possible Moody's downgrade. What are they going to do to raise more cash? I know - bundle those those insurance policies up and securitize them! For extra bonus lulz, get MBIA to insure them for that coveted AAA rating!
"knock knock.
who's there?
Ambac"
Why do I keep imagining a frustrated duck? Who helps your company give peace of mind to its bondholders? "Aaaammmmmmbbbbbaaaaaac!"
From yesterdays JPM call;
Guy Moszkowski - Merrill Lynch
Thanks, and final question on mono-line exposure, can you comment on what that is for you in terms of wrapping CDO or other instruments? How much you have and have you taken significant marks against mono-line exposures?
James Dimon
This is a very complex subject so Im going to separate it into two pieces, what Im going to call primary risk, which is where we have it, need it, own it, direct exposure to mon -- I think we are kind of okay and thats including everything you could mention.
But kind of okay, there are exposures there and so I want to be careful to say that -- I wouldnt say there are none. What would worry me far more is if one of these entities doesnt make it, is kind of the impact on markets and people who wont be able to own certain bonds or have to sell certain bonds and on the auction preferred market and all these various things, kind of the secondary effect which I think could be pretty terrible. But its really hard to predict where and how that would happen through the system.
Off topic, but Bernanke is speaking and the markets are dropping. Coincidence? - Anon
I think it's dropping partly because of the Philly Fed Index. Also, Ben recommended a quick temporary stimulus (rebates, food stamps, heating assistance) and said a "fiscal initiative at this juncture could prove quite counterproductive". Translation - Wall Street is unhappy with his speech. OTOH his next master will probably be a democrat so why not position himself for that now.
Questions Concerning my New Counter Status.
Do counters have to obey those pesky laws of arithmetic? What about gravity?
CB is clearly counting down. Does this mean we should all count in different directions? If so, can I bag upwards in latin hexadecimal but only every odd prime number?
Do we get to throw a party when the odometer turns over?
Otherwise, Over 3 Billion Served.
Thanks to MOM and CR for answering my question. I'm just a simple country lawyer, but I love the back and forth here. I'll try to keep up.
If I remember correctly, there was some guy on this board who put his life savings into Ambac not two weeks ago.
Ouch.
Just reminds of the old days. There Junkies on every corner in WS and just can't find the next fi$
jo6pac
"What would worry me far more is if one of these entities doesnt make it, is kind of the impact on markets and people who wont be able"
RJ Lets recall this:
ACA Capital Responds to Various News Reports
Thursday December 27, 8:43 pm ET
NEW YORK--(BUSINESS WIRE)--ACA Capital Holdings, Inc. (OTC BB: ACAH.PK - News) today issued the following statement in response to various stories that have run today in The New York Times, Bloomberg and other news sources with headlines suggesting that the Maryland Insurance Commissioner (the Commissioner) has taken control of its financial guaranty insurance subsidiary, ACA Financial Guaranty Corporation (ACA FG)....The trigger for today's press stories was ACA Capitals filing late yesterday of a Form 8-K disclosing the events of last week, including the S&P downgrade, the forbearance agreement with derivative counterparties, and the two letters that ACA FG entered into with the Commissioner.
If I remember correctly, there was some guy on this board who put his life savings into Ambac not two weeks ago.
Ouch.
safe_as_apartments
Yeah I recall that well. I won't name the person( well, handle anyway ) but I recall others pleaded with him to get out. Lets hope he heeded the advice.
Meantime, one last plug for Cramer's excellent anti-Wall St/financials/MBIA|ABK/regulators today:
Video - CNBC.com
-K
question : GS and all have hedged their subprime bets by shorting the ABX index. When it is time to 'cash out' who pays GS the gains they made?
Your translation makes great sense, CR. Thanks!
"I'm just a simple country lawyer.."
My brain just went on joke overload.
There is no party in counterparty
The bizarre aspect of this is that FDIC is ultimately the small depositors counterparty to absorb risk should something untoward happen to the insured bank.
Is FDIC any better of a counterparty than Ambac or MBIA ?
Ah, it seems like only yesterday:
MBIA gets $1 billion lifeline from Warburg Pincus
Posted Dec 10th 2007 2:38PM by Jonathan Berr
Shares of MBIA Inc. (NYSE: MBI) soared almost 30% after the world's largest bond insurer got a $1 billion cash infusion from Warburg Pincus LLC, a private equity firm.
The money couldn't have come at a better time for Armonk, N.Y.-based MBIA, which faced a potentially crippling downgrade from the credit rating agencies As Bloomberg News notes, "MBIA's AAA ranking stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA credit rating would endanger MBIA's ability to guarantee debt, its main source of revenue."
Oh wait. That was last month. Good job PW: 30 to 10 in one month! Only 10 more to go and you'll join Cerberus in the private equity Hall of Shame.
Which should be in about 58 seconds according to the Conjure Clock.
Just at the time when muni bonds are going to need that insurance. Sounds about right.
Cheers,
"I'm just a simple country lawyer.."
My brain just went on joke overload.
AZ_Cowboy | 01.17.08 - 11:04 am
Thanks, I'm here all week! Try the veal, and don't forget to tip your server.
Okay everybody-- Counterparty at my house! BYOB
"First when you say you don't understand I get nervous. Second when you are exposed to insured losses like this haven't you essentially bought anti-insurance? I mean you pay for insurance and then insure it yourself with that $2b but if the insurance vehicle is insolvent then you get nothing and lose your $2b. Or perhaps I have it all wrong."
You do. What it means is they've bought $2bn worth of protection against monoline insurer default in CDS form. This is an imperfect but sensible hedge of their previous hedges. Now it's possible they bought that protection from other monolines (perhaps FSA, which has fared much better than the others), but I doubt they'd be that stupid. There's still counterparty risk (whoever sold the protection), but like I say unless they're really stupid the counterparty won't be a monoline.
By the way, it went largely unnoticed at the time, but Citi announced a $0.9m write down in its results due to counterparty risk, based on $10.5bn of exposure. Clearly this is a much lower ratio than Merrill's, so either there's less ACA or they're applying different assumptions.
Okay everybody-- Counterparty at my house! BYOB - sdtfs
BYOB? Bring Your Own Bank?
That should have been $0.9bn, obviously.
Ginger,
Thanks for the explain. It sounds like they were forced to buy the same insurance twice because they don't trust the first policy and more important the markets didn't trust the first policy. I just have to wonder how much the second policy costs. I mean this isn't like last July. The insurer has got to be looking at the absolute certainty of large payouts. they'd have to be fools not to charge a premium over that. That's not really insurance so much as it is a loan loss reserve account.
sk- I was listening to Cramer in the car this morning; it was kind of stunning to hear him saying it, even though those of us who have been following this story here and at other blogs have at the least been prepared for this. It was interesting listening to the reaction of the other CNBC people; the didn't mock him as much as I remember from his 'They know Nothing' rant. They sounded pretty concerned too.
LOL sounds a lot like "2nd liens" on bond insurance liability! LOL
from Merrill this morning, the $3.1B credit valuation adjustments related to hedges with financial guarantors (ACA financial).
Merrill took a loss worth 9% of their book value on counterparty exposure to ACA.
MBIA is (was) 8X the size of ACA. Ambac is (was) 6X the size of ACA.
If the bond guarentors are downgraded, we're in for a world of hurt.
New onion available. Prize for the quickest to peel- hundreds of millions in short-sale gains.
Cramer will say 7 different things about any subject within 3 days. 2 of the things he says will be right. This is a great rant, though. Thanks SK. And maybe it does indicate that the investing public and even bubbleheads are waking up.
"Thanks for the explain. It sounds like they were forced to buy the same insurance twice because they don't trust the first policy and more important the markets didn't trust the first policy. "
Not quite, but somewhat. It isn't the same insurance. The first insurance is on their CDO exposures. The second insurance is effectively on their counterparty exposure, because if the counterparty is downgraded or defaults the first insurance is worth less (or indeed worthless).
"MBIA is (was) 8X the size of ACA. Ambac is (was) 6X the size of ACA.
If the bond guarentors are downgraded, we're in for a world of hurt. "
It's a bit apples and oranges. ACA went from AAA to CCC. The rating agencies aren't talking about doing the same thing for MBIA or Ambac - only one or two notches - even if they can't raise capital. Banks would have to provision much less, as a proportion of exposure, for a small downgrade. That said, we've all seen how many ratings have tumbled from AAA straight to junk recently, and even a small downgrade would be very painful, if only because a much larger number of people would be hit. It would also totally kill off the primary market for wrapped bonds for a good while.
When I think of Ambac and the monolines, I keep thinking of Monthy Python and I think it is "The Life Of Brian". There is a scene during the black plague where a town crier (ie a guy with a bell who shouts public notices to the public). He keeps ringing the bell and shouting : "Bring out your ." Seems appropriate for this posting. Cheers.
"We're All Counters Now."
Heh. I believe the exact quote I've used several times in the comments over the past month or so is "We're all counterparties now."
So glad to see it's catching on.
Rob Dawg:
"loan loss reserve account"?
Didn't AIG get into a heap of trouble for buying something like this from Buffet entities?
"If I remember correctly, there was some guy on this board who put his life savings into Ambac not two weeks ago."
here's his web site and he's feeling the pain:
Can Turtles Fly? A Contrarian Investing Blog
It seems to me Merrill Lynch is obfuscating (hiding) the true nature of its situation during conference calls/press releases. The same goes for Citigroup and all the rest.
My question is: Is this obfuscation similar to what the Japanese banks practiced following their real estate crash circa 1989-1995? I remember Wall Street was criticizing Japan for not taking all of its write-downs asap so it could get the disaster behind it and start with a clean slate. Now OUR banks/financials are delaying the inevitable just like Japan, right?
"We're All Counters Now."
Are those Corian (TM) counters?
"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know." -Donald Rumsfeld
Sorry. Haloscan cut off the comment. It should read: "Bring out your dead".
I've seen the MBIA bonds are now 76 bid. Wonder if the underwriters may be forced to take them back.
Underwriters are JP Morgan, Lehman, Morgan Stanley.
DEFINITION:CONFIDENCE
The feeling one has before they truly understand the situation.
Ambac's management remains confident on it's insured portfolio.
Now it's possible they bought that protection from other monolines.Tactical Flashlights
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