Ambac dodges a bullet

A reader, ContrarianDutch, says that Ambac dodged a bullet and that pretty much sums up the situation. The regulator is making a tough decision, which will make him look bad if things blow up down the road. He had few choices but he could have rolled the dice and started a big legal battle between the investment management clients and the insurance policyholders. What probably made the decision a bit easier is the fact that the investment portfolio's clients are mostly municipalities who deposit the money they raise, and hence the regulator was likely to act in their favour.

Ambac has received approval from the Wisconsin Office of the Commissioner of Insurance (OCI) to utilize the resources of AAC to resolve this liquidity gap. Sean Leonard, Chief Financial Officer, commented, “We continue to work collaboratively with the OCI as we seek to reduce balance sheet risk in an orderly fashion. This increased financial flexibility will enable us to maximize the value of financial services assets for the benefit of all of our stakeholders.”

This probably means the end of the Connie Lee idea. Ambac has very little financial flexibility now that the insurance company is using the excess capital to support the investment management business.

I don't know how much more collateral may need to be posted upon further downgrades, but this largely removes the ratings risk. Going forward, ratings have little impact on the business and Ambac is not tied to the behaviour of the rating agencies.

The next difficulty faced by Ambac will be next year, when it likely won't receive much of a dividend from its insurance subsidiary. It needs to keep costs down so that the critical costs, such as debt payments, can be serviced.