Thursday, November 20, 2008

"Ambac said that it expected to make “positive adjustments” to its mark-to-market and impairment reserves as a result of the settlements"

I'm interested in Ambac because of this Alphaville post. Here's the recent reaction to a downgrade from the NY Times:

"The big bond insurer Ambac Financial Group said Wednesday that it had agreed to pay $1 billion in cash to counterparties to cancel default protection on $3.5 billion of collateralized debt obligations.

Ambac said the settlements should improve the capital position of its insurance unit, the Ambac Assurance Corporation, which lost its AAA rating on its debt in June because of its exposure to mortgage-backed debt.

“My immediate focus as Ambac’s new C.E.O. is to restore confidence in our balance sheet through aggressive risk reduction,” David Wallis, Ambac’s chief executive, said in a statement. “Ambac has consistently emphasized that in this period of extreme uncertainty in the capital markets, the de-risking and de-leveraging of our balance sheet is our highest priority.”

Once again, Flight From Risk.

"Earlier Wednesday, Standard & Poor’s cut its ratings on Ambac Financial and its insurance unit by three notches, to A, saying the company remained exposed to heavy losses from mortgage-backed securities. Ambac’s shares fell by a third following the S.&P. downgrade.

Ambac said that it expected to make “positive adjustments” to its mark-to-market and impairment reserves as a result of the settlements, and that the move should improve its standing in capital models at rating agencies.

“It’s a positive deal for Ambac,” David Havens, a desk analyst at UBS, told Reuters. “At the end of the day Ambac would probably have had to pay more than $3.5 billion to its counterparties, though that would have happened over a longer period of time.”

Here's my comment:

So:
1) Ambac’s credit rating was downgraded, so:
2) It had to meet higher capital requirements, so:
3) They bought back some insurance policies for less than their full payout price, thereby getting their debt limit down and so saving them from putting up more capital, but they did have to buy the policies out
Is that it?
And the people getting the cash for a possible higher payout later got, what, a tax deduction?

— Posted by Don the libertarian Democrat

Unlike Alphaville, the NY Times doesn't respond to posts.

Here's from Bloomberg:

"Nov. 19 (Bloomberg) -- Ambac Financial Group Inc., the second-largest bond insurer by outstanding guarantees, agreed to pay $1 billion in cash to cancel default protection on $3.5 billion of collateralized debt obligations, further freeing itself from the largest source of losses in its industry.

The settlement will result in positive adjustments to the Ambac's mark-to-market and impairment reserves, and improve its standing in rating-firm models, according to a statement today from the New York-based company.

Ambac and rivals including Syncora Holdings Ltd. and FGIC Corp., after being stripped of AAA ratings because of their CDO guarantees, have been able to cancel some of their contracts on mortgage-tied CDOs at discounts to their projected losses. In some cases, the banks with the protection also have benefited, after marking down the guarantees to reflect the insurers' declining creditworthiness amid surging U.S. foreclosures.

``My immediate focus as Ambac's new CEO is to restore confidence in our balance sheet through aggressive risk reduction,'' Chief Executive Officer David Wallis said in the statement."

Same basic story.

"Ambac's ``exposures in the U.S. residential mortgage sector and particularly the related collateralized debt obligation structures have been a source of significant and comparatively greater-than-competitor losses and will continue to expose the company'' to potentially greater-than-expected losses, Standard & Poor's said in downgrading the company earlier today.

CDOs repackage assets such as mortgage bonds and buyout loans into new debt with varying risks. The debt, much of which was tied to subprime-mortgage securities, has been the largest source of more than $966 billion of writedowns and credit losses reported since the start of last year by global financial firms.

Ambac today fell below $1 a share for the first time since going public in 1991 after its insurance rating was cut three levels to A by S&P. The shares declined 38 cents to 76 cents as of 4:15 p.m. in New York Stock Exchange composite trading, though they rose as high as $1.09 in late trading.

The shares are down 97 percent over the past 12 months.

Moody's Investors Service cut Ambac on Nov. 6 to Baa1, two steps lower than S&P's current ranking, prompting the bond insurer to post collateral and terminate contracts by shifting cash from its guarantee unit to its investment division."

Now, I want to follow Ambac because Alphaville believes that its whole mode of insuring bonds is dead, and this fascinates me.

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