Thursday, February 14, 2008 3 comments ++[ CLICK TO COMMENT ]++

The State of the Bond Insurance Industry Hearings Today

US Congress is holding a hearing on the bond industry today. We have parties representing different interests including the New York insurance regulator, Federal Reserve, bond issuer, rating agency, bond insurers, and bond insurer shorts. Missing from the hearing are the big Wall Street investment and money center banks, some of whom have big exposure to the insured bonds and structured products. Bond insurance buyers, such as hedge funds, pension funds, and retail investors, are also not represented. So this is all from the "seller/issuer" point of view. The federal government probably can't (and won't) do anything right now but, nevertheless, we can get a sense of where some parties stand. The Federal Reserve likely won't do anything either since insurance is likely outside their mandate.

As an Ambac shareholder, I'm still against any government intervention. We need a private-sector plan. If the government wants to do something, they should direct their efforts at the subprime borrowers who are on the verge of default.


3 Response to The State of the Bond Insurance Industry Hearings Today

February 14, 2008 at 12:15 PM


February 14, 2008 at 2:21 PM

Downgrade Dodger
Ambac CEO Seeks Relief
In Wake of 'Mistakes';
House Testimony Today
February 14, 2008; Page C1

Being a pilot, going back to his days in the Marine Corps, Michael Callen knows how to navigate through dicey situations. Now, the interim chief executive of Ambac Financial Group Inc. will be putting his skills to a new test.

The 67-year-old Georgetown University professor and former banking executive is trying to help Ambac dodge further credit-ratings downgrades. Fitch Ratings, a unit of Fimalac SA of Paris, has cut the bond insurer's coveted triple-A rating to double-A.

Many people have a lot riding on whether Mr. Callen succeeds. Ordinary investors who hold municipal bonds insured by Ambac could see the value of their holdings fall if the New York company is downgraded. Banks, too, hold securities insured by Ambac.

Mr. Callen, an Ambac director since 1991, took over after Robert Genader stepped down last month. Mr. Callen, who is scheduled to testify before a House Financial Services Committee panel today, isn't keen on the idea of an industry bailout. Earlier this week, he dismissed billionaire Warren Buffett's offer of reinsuring the muni-bond portfolios of Ambac and two rivals as something reserved for "absolute desperation."

He talked recently about his new flight plan for Ambac.

WSJ: There has been so much talk about possible rescue plans for bond insurers. Can you bring us up to date on the situation as it regards to Ambac?

Mr. Callen: There are limited things I can tell you about negotiations going on. We know that we are going to have to raise capital. We're working very hard and diligently on that. I'm not going to say anything beyond that. But here is one of the issues on raising capital: This is Wall Street, good old capitalism; the objective is to leave you with your socks and a smile. If they think there is some deadline that the ratings agencies set down, after which you're going to be executed, that's the way they would behave. We have to be tough in return, and you have to be ready to walk away from the table. We're in that kind of a process. I am hoping that we're getting to the endgame of it. We intend to stay triple-A.

WSJ: What types of folks are coming up to you and talking to you about potential capital-relief plans?

Mr. Callen: I can't use any names, but it's the usual suspects. There is a rumor around that there are some banks who don't want to see us downgraded, or any other member of the industry. There is an expression that they use in Britain: You may very well believe that, but I couldn't possibly comment.

WSJ: We've written about the bailout.

Mr. Callen: I don't accept that term, but go ahead.

WSJ: Why don't you accept that term?

Mr. Callen: This is a very solid, liquid, high-earning, well-managed company that is responding to, not a reality, but perceptions of where mortgages are going over the next four or five years. And in those projections there is very little hard data except comparisons of very early results from the vintages mainly '06, '07. I think you're going to start to see, and I think you're beginning to see already, analyst estimates of ultimate losses declining. We need more capital because the rating agencies have put [out] different stress models. That's not a bailout. What it is, is a view of the world that says, "Ah, you need more capital."

WSJ: With any capital raising, how do you intend to deal with the possibility of shareholder dilution?

Mr. Callen: The economic-dilution issue is not straightforward and simple. With our stock price having come from the middle of last year [from $96.08 in May to a low of $6.20 last month, and yesterday at $9.37 in 4 p.m. New York Stock Exchange composite trading], these are injured folks, and not in the best mood.

Let's say that we did something on the capital front that restored some confidence. I think the announcement of a plan of that kind, not just for us but for anybody in the industry, would result in a jump in the stock price. People who still hold our shares, even if you technically dilute them, their economic wealth could be more than it was. And most of our shareholders understand that. But you also have to be very fair to them in anything you do, and give them opportunities to partake or to share.

WSJ: Isn't raising capital an admission that management made a mistake?

Mr. Callen: Ambac makes mistakes. Every business does. But if you need to raise capital from the outside, something you didn't expect took place.

WSJ: How did Ambac get into this situation?

Mr. Callen: We had a business proposition that was extremely transparent. ...It's on our Web site. This transparency was the signature of this particular company. We then decided, because we wanted some growth we didn't perceive available in the muni market, that golden triple-A kind of proposition, we then decided we would get into this thing called [collateralized debt obligation]. And we went beyond that and got into CDO-squareds.

So we went out and wrapped some of these CDO-squareds at various levels. In my opinion, when you get down to the bottom line, we took a fairly simple business proposition, highly transparent and one that everybody understood, and we made it too opaque.

WSJ: So was the board involved in the decision to go into CDOs?

Mr. Callen: At that time, the management was given -- and it should be given -- a lot of discretion. We were in the mortgage business for years. This is nothing more than residential mortgage-backed securities, but they're leveraged up more. We have regular board reviews of the portfolio.

WSJ: What kinds of changes are you putting in place to ensure this doesn't happen again?

Mr. Callen: We have brought in consultants to look at structured-finance business.

The rating agencies want to be convinced, as do we, that you had a stock-price decline. Are you sure that you have a risk system and an underwriting set of guidelines? Even if you do, you'd better do a thorough review.

WSJ: Looking back, is there something you wouldn't have done?

Mr. Callen: CDO-squareds. Maybe the size of deals is something we want to look at. Inside of Ambac, the capital-allocation and the internal-rating system have always been more severe than the rating agencies are. I don't think there's any shortfall there.

WSJ: What do you think is the real cumulative-loss rate, given your experience and knowledge of the situation?

Mr. Callen: One of my good friends/contacts says, "If you show me 13% cumulative losses on 2006, you have to demonstrate to me the economic infrastructure that permits that to happen. You have to tell me that Congress has been paralyzed when the real risk is that they'll overreact."

I think what we're dealing with all in all is a $200 billion to $250 billion problem, i.e., something less than the S&L crisis when it's all over.

Are these losses or are they what somebody expects them to be? They're all the latter, not the former.

WSJ: Do you have time to manage bad perception?

Mr. Callen: We have to respond to those perceptions because we're in the confidence business. The role we play we call "bringing financial peace of mind." At the moment we're not doing that.

WSJ: What amount do you plan to raise?

Mr. Callen: We're talking north of $1 billion. There are a number of ways to skin that. What people want is a reduction of uncertainty and they want you to clip off the tail risk. So there are all kinds of excess loss, capital notes that they would count as capital, equity issues, preferred issues. There are at least five or six paths, and the excess loss is probably the least expensive.

One place you really don't want to go for help when you really need it is Wall Street. If you're on your knees looking for water, they'll give you a spoonful of sand. But that's the way it's supposed to work.

Write to Karen Richardson at and Liam Pleven at

February 14, 2008 at 3:05 PM

Wow... great interview. Thanks for posting that Cak.

Michael Callen captured the nature of Wall Street pretty accurately. I don't think it does shareholders any favour but it does shed light on the situation... swimming with the sharks for sure...

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