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Thursday, January 17, 2008

Ambac -60%, MBIA -30%

Ambac and MBIA are both getting shot on the open here.
Heads up.

Wednesday, January 16, 2008

MBIA, Ambac: Update

S&P Will Re-Examine Bond Insurers After Revising Assumptions: “Standard & Poor's plans to re-examine bond insurers including MBIA Inc. and Ambac Financial Group Inc. to see if the companies hold enough capital to protect their AAA credit ratings.

S&P, which completed a review of the bond insurers in December, will reassess its results based on new assumptions about the housing market announced yesterday, according to Mimi Barker, a spokeswoman for S&P in New York. The credit rating company plans to have the update completed within a week, Barker said.”

Way too little and way too late… and doing it now will only result in more aggressive downgrades on CDO’s and thereby kill MBIA and Ambac faster.

MBIA's Surplus Notes Plunge 12% on Capital Concerns (Update1): “MBIA Inc.'s surplus notes have tumbled as much as 12 percent since they were sold last week on concern that the world's largest bond insurer may need to tap investors for more money.

The AA rated debt fell as low as 88.5 cents on the dollar today, according to bond traders. That's the equivalent of a yield of 18 percent, data compiled by Bloomberg show. The notes were trading at 97.5 cents yesterday, according to Bloomberg data.

MBIA raised $1 billion in the Jan. 11 offering to stave off a reduction in its AAA credit rating. While Fitch Ratings today affirmed the ranking, investors are concerned losses on subprime mortgage securities may grow, Peter Plaut, an analyst at Sanno Point Capital Management in New York, said today in an e-mail.”

Imagine that… the bagholders that bought the MBIA notes only five days ago must be raging right now. Down 12% in five days. If you can’t spot the sucker in the first hour at the table, you are the sucker…

Ambac Financial Group (ABK) is down $8.17 today or 38.65%. After what happened to the MBIA notes, how will Ambac be able to raise that $1 billion it so desperately needs?

See this morning’s post for more on Ambac.

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.

Monday, January 14, 2008

Sears, IBM, and a Reflex Bounce

Equity futures weren’t doing much of anything early this morning until IBM announced it’s numbers. Equities went instantly bid.

As I’ve mentioned last week, stocks are deeply oversold on a technical basis and are itching for a reason to pop a bit. Today is probably the day. I mentioned how badly the market was setup to rally last Thursday in Capital One, Freddie Mac, Money Markets and Hammers.

Beware: Tomorrow will make or break the bounce. Countrywide reports tomorrow. A really massive write down could end the party early. Also, tomorrow we get PPI (inflation numbers), retail sales (the health of the consumer) and Empire State (manufacturing). With the indices at key technical levels, these numbers will be very important.

IBM Beats Estimates on Emerging Markets; Shares Climb (Update2): “International Business Machines Corp., the world's biggest computer-services company, posted earnings and sales that topped analysts' projections as orders from Asia and Europe bolstered results.

IBM advanced 8 percent in early trading, which would be the most in more than five years if it holds when U.S. markets open. Fourth-quarter profit climbed to $2.80 a share and sales rose to $28.9 billion, exceeding predictions by more than $1 billion.

Business in Asia, Europe and developing countries drove results, Chief Executive Officer Samuel Palmisano said today in a statement. The remarks eased concern that slowing economic growth in the U.S. will drag down technology company profits and marked a reversal from the previous quarter, when IBM disappointed investors with slack hardware sales.

Analysts anticipated profit from continuing operations of $2.60 a share and revenue of $27.7 billion, according to the average of estimates compiled by Bloomberg.

The company plans to report full results on Jan. 17.”

Sears Holdings Shares Drop on Holiday Sales Decline, Downgrades: “Sears Holdings Corp., the retailer run by investor Edward Lampert, fell as much as 12 percent in early U.S. trading after saying profit will trail analysts' estimates following a drop in holiday sales.

Analysts at Goldman, Sachs & Co. and Credit Suisse Group downgraded the stock, saying investors should sell the shares.

Sears Holdings fell $10.17 to $86 at 7:48 a.m. in trading before U.S. markets opened. The shares dropped 39 percent last year.

“We expect the retailer to experience accelerated share loss and profit pressures in an increasingly tough macro backdrop,” Goldman Sachs analysts including Adrianne Shapira in New York wrote in a report to investors today.

Retailers slashed prices by 50 percent or more during the holidays to lure consumers spending more than $3 a gallon for gasoline and facing declining home prices. The National Retail Federation said today that sales may rise at the slowest pace in six years in 2008.

Profit in the fourth quarter ending Feb. 2 will be $350 million to $470 million, or $2.59 to $3.48 a share, compared with $820 million, or $5.33, a year earlier, Sears said today in a statement.

U.S. sales fell at its namesake and Kmart retail chains by about 3.5 percent in the nine-week holiday shopping season ended Jan. 5, citing increased competition and a weak economy.”

Never forget. A bounce is in order, but that is all it is. Sears is one of many barometers of economic health… or lack there of.