Ambac Deal Hits A Wall

UPDATE: Ross says his investment in AGO does not preclude him from putting money into one of the other monolines through AGO. In plain English this means that AGO may entertain the thought of offering reinsurance to others (obviously at better rates than Buffet's ridiculous offer). Since Ambac is pursuing a very large capital injection I don't think they will consider reinsurance for the time being (however, given that the structure of the deal is constantly changing, anything can happen).

I hate to be posting a lot of unsubstantiated speculations but Ambac is a big, critical, holding for me so I'm following it closely. The latest rumour from CNBC is that the Ambac deal being put together by a consortium of banks, private equity, and other interests, has hit a wall.

The snag was hit Wednesday, when raters said they wanted to see more capital injected in the bond insurer if it is to get a triple-A rating, after the consortium of banks had agreed to come up with $2.5 billion in capital.

The interesting thing is that the shortage of capital seems to be due to the 'split'. The proponents are going to go back to the original plan of keeping the company together:

The consortium will now come up with another structure, which keeps the two together, which could mean that they would need even less capital to keep their triple-A rating, sources close to the deal said.

My guess is that the rating agencies are demanding a high amount of capital for the structured product side during a split. My feeling is that the structured side probably has enough capital (with the $3billion plan) for an AA- rating but the consortium may be pushing to keep that side at AAA (or very close to it).

In other news, Wilbur Ross has decided to invest in Assured Guaranty. This is surprising to me since AGO isn't really facing any problems and can easily raise capital from public sources. Investing in AGO doesn't involve much risk and I wouldn't really consider it a distress situation. If I recall, they didn't write any subprime mortgage insurance since 2004 and the stock is only down around 30% from its 52wk high (vs around 15% for S&P 500).

MBIA also mentioned that further writedowns in January are likely and that they didn't write much new business in January. None of this is really a surprise to me. Ambac and MBIA market share was basically close to zero in January. The additional writedowns are to be expected but the important thing to me is whether they are smaller than before. MBIA has exposure to commercial real estate (Ambac doesn't) and we have seen some deterioration on that front as well.


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