Thursday, December 20, 2007 2 comments ++[ CLICK TO COMMENT ]++

Fortunes of Ambac and MBIA Diverge

When took a cursory look at MBIA a few months ago, it looked safer than Ambac. But, man, was I wrong. The fortunes of the two have diverged lately, and with the latest disclosure of seemingly higher CDO-squared exposure than market expectation, it looks like MBIA may indeed be a riskier pick. I think the analyst being quoted in the article pretty much nails the present situation:

"This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' relative to Ambac," said the Morgan Stanley report, which was co-written by analysts Ken Zerbe and Yoana Koleva.

S&P losses for MBIA are also higher and here is the breakdown of their analysis (table 7 in the press release):

(source: S&P Detailed Results Of Subprime Stress Test Of Financial Guarantors, Dec 19 2007 (table 7) )

Based on the 9 bond insurers that S&P was reviewing, they are projecting an industry-wide loss of $10.8 billion. The verdict is still out on whether the bond insurers will make money on their venture into RMBS and CDOs. It looks like many investment banks will actually lose money with their mortgage-related businesses but I suspect the bond insurers will eke out a small profit.

S&P is projecting a loss of $1.8 billion and $3.2 billion for Ambac and MBIA, respectively. This compares with the bear case of around $4 billion for Ambac (superbear case is generally $7+ billion and involves bankruptcy but I don't find that reasonable). I think Ambac needs to raise $500 million to $1 billion to stay comfortable for the time being. The tricky thing is timing. Ambac will likely earn $700 million next year (ignoring mark-to-market charges) so they can try waiting. As S&P points out in their report, that's the luxury available to bond insurers (i.e. since they don't pay losses all at once or post collateral, they can just wait). But if someone is pursuing the waiting strategy, they need to make sure their ratings don't get cut and shareholders don't get angry since they won't see any profits (not that bond insurers pay out much in dividends or anything).

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2 Response to Fortunes of Ambac and MBIA Diverge

December 20, 2007 at 12:34 PM

I feel very lucky to have stumbled on to a good thing. This illustrates the perils of picking your own stocks on a concentrated bet. MBI was heavily favored by Marty Whitman. Obviously, they have done a deep dive into the numbers as well as what they normally do for due diligence, yet, it was still hiding stuff this late into the game. It could easily have happened to ABK as well.

This gives me the confidence that ABK will be one of the survivors. I think MBI will survive as well. They might be cheap enough now to be looked at as a possible investment.


December 20, 2007 at 5:34 PM

Now Fitch is saying that they want an additional billion for MBI, other wise they will down grade them. At current price levels, it represents 30% of the company, if they can find the money.


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