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Ambac Posts First Loss as Subprime Bond Prices Drop (Update6)
By Christine Richard
Oct. 24 (Bloomberg) -- Ambac Financial Group Inc., the world's second-largest bond insurer, reported its first quarterly loss after reducing the value of subprime mortgage-linked securities by $743 million.
The shares fell the most in 2 1/2 years after New York-based Ambac said it had a third-quarter net loss of $360.6 million, or $3.51 a share, compared with net income of $213 million, or $1.98,
Ambac, MBIA Inc. and other bond insurers have guaranteed billions of dollars of AAA rated collateralized debt obligations that are backed by low investment-grade rated portions of mortgage-backed debt. Merrill Lynch & Co.'s $3.1 billion writedown of such securities furthered concern today about the exposure that bond insurers have to these structured finance products.
Now here is the twist? CDS used for guaranteeing. Since CDS are marked to market they have to accept the loss. Else they would not have done that .
CDOs package bonds, mortgages and other assets, using the income to pay investors. Ambac guaranteed payments on some of those securities using credit default swaps, a type of derivative, rather than traditional insurance policies.
Under generally accepted accounting principles, derivative positions must reflect price changes, and unrealized gains or losses placed on income statements. Changes in the value of bonds the companies guaranteed don't require such treatment, which has contributed to the stability of insurers' earnings in the past.
Another Story : What happens when Transactions Mature
Ambac Chief Financial Officer Sean Leonard said the company doesn't expect to have to make payments on CDOs.
``There's an element of illiquidity and market distress'' in the prices, Leonard said. ``They do not translate into an expectation for claims.''
Profit excluding the CDO losses was $1.88 a share, Ambac said. The average analyst estimate was for $1.88, according to a Bloomberg survey.
``Ultimately, this mark-to-market will reverse as the insured transactions mature,'' Tamara Kravec, an analyst with Bank of America Corp., wrote in a report. She recommends investors buy the stock. Outrageous!.. What is the expected maturity of these transaction. 1yr 2 yr 3 yr .... The credit crunch is now and in these markets it takes only LUCK to predict the future since many pundits failed to do so about the mortgage markets.
Internal Downgrades
Ambac has downgraded its internal ratings on some of the CDOs and expects the ratings companies will follow.
Some critics of the bond insurers have said top-rated CDOs made up of lower-rated securities could become worthless if mortgage defaults escalate.
Ambac said its credit enhancement production, a measure of all new business, rose 99 percent to $431.1 million in the quarter. The measure, which doesn't adhere to generally accepted accounting principles, is defined by Ambac as gross upfront premiums and the present value of estimated installment premiums on insurance policies and structured credit derivatives.
Now guys this is interesting. William Ackman is short on monolines. Generally you never publicize in the market about your short position as this is considered negative but this gentleman had declared openly
Hedge fund manager William Ackman, president of New York- based Pershing Square Capital Management LP, said in May that investors may be underestimating the risk that Ambac and MBIA had from rising delinquencies.
``When losses hit, the guarantees will have no value and counterparties are left holding the bag,'' Ackman said at a charity event in New York on May 23.
Other monolines
1. Security Capital Assurance Ltd., which is scheduled to announce earnings on Oct. 25, said last week that it will take a mark-to-market loss of $145 million on credit derivatives.
2. Assured Guaranty Ltd. told investors on Oct. 22 it had unrealized losses of $163 million for the third quarter, mainly related to a drop in the market value of derivatives linked to corporate loans. The company will report full quarterly earnings on Nov. 8.
3. MBIA, the largest bond insurer, is scheduled to announce third-quarter earnings Oct. 25. MBIA fell $2.74, or 4.7 percent, to $55.19 today in New York Stock Exchange composite trading.
Moody's, Merrill Lynch
Moody's Investors Service and Standard & Poor's are under scrutiny by regulators and lawmakers for giving high credit ratings to subprime mortgage securities that subsequently tumbled in value. Some investors have said the companies also failed to act quickly enough in lowering those ratings as mortgage defaults rose. Some bonds have fallen more than 80 cents on the dollar.
Moody's Corp. today said it's third-quarter profit dropped 13 percent because there were fewer issues of structured finance products to rate.
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What more can I say about monolines. Refer to my previous article on monoline
------------------------------------------------------------------------------------------------------------
This article is adapted from Bloomberg and edited with my comments.
"Dont shoot the messenger"
Ciao
By Christine Richard
Oct. 24 (Bloomberg) -- Ambac Financial Group Inc., the world's second-largest bond insurer, reported its first quarterly loss after reducing the value of subprime mortgage-linked securities by $743 million.
The shares fell the most in 2 1/2 years after New York-based Ambac said it had a third-quarter net loss of $360.6 million, or $3.51 a share, compared with net income of $213 million, or $1.98,
Ambac, MBIA Inc. and other bond insurers have guaranteed billions of dollars of AAA rated collateralized debt obligations that are backed by low investment-grade rated portions of mortgage-backed debt. Merrill Lynch & Co.'s $3.1 billion writedown of such securities furthered concern today about the exposure that bond insurers have to these structured finance products.
Now here is the twist? CDS used for guaranteeing. Since CDS are marked to market they have to accept the loss. Else they would not have done that .
CDOs package bonds, mortgages and other assets, using the income to pay investors. Ambac guaranteed payments on some of those securities using credit default swaps, a type of derivative, rather than traditional insurance policies.
Under generally accepted accounting principles, derivative positions must reflect price changes, and unrealized gains or losses placed on income statements. Changes in the value of bonds the companies guaranteed don't require such treatment, which has contributed to the stability of insurers' earnings in the past.
Another Story : What happens when Transactions Mature
Ambac Chief Financial Officer Sean Leonard said the company doesn't expect to have to make payments on CDOs.
``There's an element of illiquidity and market distress'' in the prices, Leonard said. ``They do not translate into an expectation for claims.''
Profit excluding the CDO losses was $1.88 a share, Ambac said. The average analyst estimate was for $1.88, according to a Bloomberg survey.
``Ultimately, this mark-to-market will reverse as the insured transactions mature,'' Tamara Kravec, an analyst with Bank of America Corp., wrote in a report. She recommends investors buy the stock. Outrageous!.. What is the expected maturity of these transaction. 1yr 2 yr 3 yr .... The credit crunch is now and in these markets it takes only LUCK to predict the future since many pundits failed to do so about the mortgage markets.
Internal Downgrades
Ambac has downgraded its internal ratings on some of the CDOs and expects the ratings companies will follow.
Some critics of the bond insurers have said top-rated CDOs made up of lower-rated securities could become worthless if mortgage defaults escalate.
Ambac said its credit enhancement production, a measure of all new business, rose 99 percent to $431.1 million in the quarter. The measure, which doesn't adhere to generally accepted accounting principles, is defined by Ambac as gross upfront premiums and the present value of estimated installment premiums on insurance policies and structured credit derivatives.
Now guys this is interesting. William Ackman is short on monolines. Generally you never publicize in the market about your short position as this is considered negative but this gentleman had declared openly
Hedge fund manager William Ackman, president of New York- based Pershing Square Capital Management LP, said in May that investors may be underestimating the risk that Ambac and MBIA had from rising delinquencies.
``When losses hit, the guarantees will have no value and counterparties are left holding the bag,'' Ackman said at a charity event in New York on May 23.
Other monolines
1. Security Capital Assurance Ltd., which is scheduled to announce earnings on Oct. 25, said last week that it will take a mark-to-market loss of $145 million on credit derivatives.
2. Assured Guaranty Ltd. told investors on Oct. 22 it had unrealized losses of $163 million for the third quarter, mainly related to a drop in the market value of derivatives linked to corporate loans. The company will report full quarterly earnings on Nov. 8.
3. MBIA, the largest bond insurer, is scheduled to announce third-quarter earnings Oct. 25. MBIA fell $2.74, or 4.7 percent, to $55.19 today in New York Stock Exchange composite trading.
Moody's, Merrill Lynch
Moody's Investors Service and Standard & Poor's are under scrutiny by regulators and lawmakers for giving high credit ratings to subprime mortgage securities that subsequently tumbled in value. Some investors have said the companies also failed to act quickly enough in lowering those ratings as mortgage defaults rose. Some bonds have fallen more than 80 cents on the dollar.
Moody's Corp. today said it's third-quarter profit dropped 13 percent because there were fewer issues of structured finance products to rate.
------------------------------------------------------------------------------------------------------------
What more can I say about monolines. Refer to my previous article on monoline
------------------------------------------------------------------------------------------------------------
This article is adapted from Bloomberg and edited with my comments.
"Dont shoot the messenger"
Ciao