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Wednesday, January 16, 2008

Ambac, Monoline Insurer's: The End Game

Forget everything else. This here is the most important development right now:

Ambac Will Cut Dividend, Raise $1 Billion in Capital (Update1): “Ambac Financial Group Inc., the second-largest bond insurer, will slash its dividend 67 percent and raise more than $1 billion in new capital to preserve its AAA credit rating.

Chief Executive Officer Robert Genader will be replaced after presiding over the New York-based company's first-ever loss last quarter, Ambac said in a statement today. The company said it will report another loss this quarter after writing down the value of securities it guarantees by $3.5 billion.

The infusion of capital, which may include the sale of shares and convertible stock, will satisfy ratings companies, Ambac said. Ambac follows MBIA Inc., the largest bond insurer, which cut its dividend last week and raised more than $2 billion in new capital. The loss of Ambac's AAA stamp would jeopardize ratings on $556 billion of bonds and threaten the company's ability to guarantee new issues.”

Its still isn’t even close to enough. Get up to speed on the ‘monoline insurers’.


From Naked Capitalism:

The Monoline/Credit Default Swap Nexus (Not for the Fainthearted): “After bond fund giant Pimco's Bill Gross gave a back-of-the-envelope estimate of a possible $250 billion in losses resulting from the impact of deteriorating corporate credit and bond defaults on the $45 trillion (notional amount) credit default swaps market, other commentators have been making improved (but still quick and dirty) calculations.

One interesting effort appears in today's Financial Times "The fire threatens credit insurance," by David Roche of Independent Strategy. Roche looks at a topic near and dear to our hearts, the impact of the just-about-inevitable downgrading of the monoline insurers. He focuses on them by working through the question: what happens if we start witnessing counterparty failure on top of mere required default payments? He sees the bond insurers like Ambac and MBIA as the most probable flash points, and the resulting damage in the ballpark of $400 billion.”

MBIA, Ambac: Dead Men Walking: “Ooof, I am in possession of a hefty and detailed presentation on MBIA and Ambac by an investor that is short the stock of the two holding companies. I believe it is kosher to summarize its findings, particularly since it is all derived from public information. And you probably didn't want to something that long anyhow.

It is one scary and persuasive document. The bottom line: there is no way these companies will survive. Their liabilities are so far in excess of their capital that there is no hope, nada.”

From Alphaville:

Brace yourselves: S&P adjusts risk models:

Late last night, rating agency Standard & Poor’s did some quiet housekeeping.
In a late press release, S&P announced it was adjusting its cumulative loss measure on 2006 subprime collateral to 19 per cent - up from 14 per cent:

We revised our expected losses for the 2006 vintage subprime collateral to 19% from 14%, as delinquencies continue to rise, and we will recalculate lifetime loss expectations for all vintages of U.S. RMBS. Additional losses are projected to result directly for the additional delinquencies and defaults.

The press release is somewhat anodyne, but the implications of that tweak are disturbing:
It will mean huge new downgrades on CDO tranches from the 2005 vintage through to 2007.

We suspect this will push hundreds more CDOs through “events of default” and a significant number into liquidation - a likely repeat of the disastrous events in November and December, when CDOs went into meltdown and banks were forced to admit further humiliating writedowns. The last time S&P tweaked their loss-curves was at the end of October.

S&P are also altering their metrics; RMBS rating models will now apply the adjusted cumulative loss measure over the lifetime of the structures they rate - not just (as has hitherto been the case) over a 36-month period. That will likely make senior CDO investors more keen to liquidate deals: super senior swap holders, or AAA note holders in many CDOs have thus far been keen to accelerate but not liquidate the transactions on the basis that things will inevitably improve. The new model suggests they wont: controlling note holders now have every incentive to exit fast.

The crisis won’t just be restricted to CDOs - or subprime. Any structure containing RMBS will suffer; SIVs, ABCP conduits, even plain old securitisations.

And it might be the final nail in the coffin for the monolines - MBIA and Ambac. Both have maintained their crucial AAA issuer ratings by the skin of their teeth, having raised $2bn each in emergency capital to act as collateral. S&P’s metric readjustment means that the monoline stress-test they performed is now outmoded and over-optimistic. More defaults mean more insurance calls.

What remains to be seen now is when those calculations will feed through into a cataract of rating actions.


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