Friday, April 25, 2008 0 comments ++[ CLICK TO COMMENT ]++

Ambac Management Doesn't Believe AAA Rating Under Threat

I haven't had enough time to analyze Ambac's earnings call (or even listen to it fully). I'll try to go through them by this weekend (although I still have to do my taxes (I'm in Canada) so I'm not sure when I'll get to it. In the meantime, I ran across a very good, and lengthy (30min), interview with Michael Callen, Ambac CEO, conducted by Bloomberg. Anything from management is likely to be sugarcoated, but, nevertheless, it sheds some light on the current state.

You can also find the write-up summarizing some of the interview here (if the video in the first link doesn't work, go to this page and click on the link in the top-right section). To sum up, a big issue at the top of every shareholder's list is the AAA rating. Management rolled the dice with massive dilution in the hopes of maintaining the rating so the consequences are huge. Management doesn't believe its AAA rating is under threat (S&P and Moody's also reaffirmed their views yesterday.)

Ambac is a really tough investment for me. And I'm not even talking about the huge plunge in price. The difficulty is that everything is shrouded in mystery. This is one of the rare investment cases where the company can be insolvent long before it is bankrupt. Unlike a typical industrial company or even a financial company that will collapse under liquidity problems first, the monolines really don't face liquidity problems. Everything depends on what may or may not happen with widely diverging results based on small changes. The reason obviously is because this is a long-tail probability case (small probability of massive losses far into the future). Although some of the bears, not to mention the short-sellers, like to pretend that massive losses are imminent and highly probable, the fact of the matter is that the losses are spread out and they are low probability.

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