by Calculated Risk on 4/23/2008 11:40:00 PM

Here are some more Ambac comments. Note: here is the referenced Ambac Presentation

Sean Leonard, CFO: ... David, you could discuss kind of the breakout of some of the HELOC portfolio being that big portion of the portfolio is related to large bank transactions versus [investment bank generated] shelf transactions.

David Wallis, Chief Risk Officer: Yes, it is very striking. One has various hypotheses about this, and we are investigating those hypotheses. But it is very striking how concentrated, how very concentrated, some of the poor performers are, and that gives rise to all sorts of obvious questions.

I mentioned that we have diagnostic and forensic people working on some of these deals. We are beginning to see stuff back from that. The diagnostic is basically running tapes looking at delinquencies and trying to figure out given what you now know and what you knew then, would you have expected that delinquency or not? And if the answer is not, well, that is interesting.

So, in other words, you have an incredibly low FICO within a pool, and it is delinquent. Well, maybe you expected that. But if it is incredibly high and the LTV was incredibly low, then maybe you would not expect that.

So then what you do is, you take an adverse sample, so you run the tape through a program, take an adverse sample, i.e. looking for the suspicious ones, and then what you do is you go look at the files. That is a very difficult long process, but you look in the files. You look at the transcripts of servicing records, and you see what you see. And all I will say is that there is some pretty amazing stuff to see. So very concentrated adverse exposures, that is really the message here.
emphasis added

"Pretty amazing stuff to see." It's not clear if he is referring to fraud - but it sounds like it.

Q: Analyst: Can you clarify for the home equity and the Alt-A reserve strengthening, are the credit reserves there now kind of reflective of estimated lifetime losses? And if so, I guess that is my understanding of how it works per quarter. What has changed if you look at Q1 where we are versus Q4? And what could move us further down back that in terms of changes as we look forward through the year?

David Wallis, Chief Risk Officer: Sure, let me take a go at that ... the notion is that we're taking a present value of the losses or the claims that we expect to pay over the life of the deal.

Just to relate that, people always like to relate it to cumulative loss because that is the statistic that people bandy around. Let me just give you a bit more insight onto that. I think in the presentation we talked about -- in fact, it is the most egregious example, the Bear Stearns deal, where we are expecting or re-modeling at least around 82% of collateral loss. So you've got 100 people in the round that took out a closed-end second in this deal, 82 have walked out and not paid you a whole lot back, 100% severity.

Just in relation to other transactions, just to give you some more data and just be open with what we're looking at here, I mentioned that in mid prime [Alt-A], we are kind of 20 to 25% collateral loss. In HELOC they vary, the ones we have reserved from I think about a low of mid-20s to a high of just north of 50. So that is collateral loss.

In terms of what has happened and where does it go from here, probably a good thing to do is to look at the chart on page 31, and you get a pretty good sense of what has happened in the last few months. You know, basically losses have taken off in that transaction.

Sometimes you get perplexing movements. I will draw your attention to one. If you look at the First Franklin deal, which is also in the charts that I presented, you will see four months ago I think it was quite a marked flattening in delinquencies. That proved to be a false dawn because, although delinquencies -- the trajectory there has flattened, actually losses have continued to escalate. So the data is difficult. You get very odd data.

To give you a sense of how odd the data is, the remits are actually beginning to come in somewhat late because sometimes people don't believe the data that is being presented, and they send it back and say, well, that cannot be right. But, in fact, unfortunately some of it is right, and the numbers are huge.

Where can it go? Again, look at page 31, and I admit this is the extreme example. A criticism might be, well, look at the very sharp dimunition in monthly realized loss that is being projected here through the role rate methodology. And it is true, it is a fairly sharp diminution. However, it has to be because if it is not, you end up with more than 100% of collateral loss, which does not make any sense either.

So I think further discussion that Mike just had in relation to subprime and what is outstanding and what does that imply about future default and severity rates to get to a given collateral loss, we're seeing some of the same things certainly in relation to our most stressed transactions. You know, how bad can it get? 81 people in 100 walking away sounds pretty bad to me.

by Calculated Risk on 4/23/2008 05:04:00 PM

Video: Joseph Mason Says `Way Past Time' for Ambac Rating Cuts (click link for video)

Joseph Mason, an associate professor of finance at Drexel University, and Julia Coronado, a senior economist at Barclays Capital Inc., talk with Bloomberg's Kathleen Hays about Ambac Financial Group Inc.'s credit rating, economic and financial-market conditions, and the outlook for Federal Reserve monetary policy.

(Source: Bloomberg)

by Calculated Risk on 4/23/2008 01:55:00 PM

On the AMBAC conference call this morning, David Wallis, Ambac's chief risk officer noted that their 'losses are heavily concentrated in a small number of deals which they characterized as “striking” and essentially suspicious' (reader Brian's description). The also made some comments on their Alt-A deals - AMBAC has half a dozen deals now projecting cumulative losses of 20-25% vs initial expectations of approximately 6%.

According to Brian, AMBAC hinted that they might pursue legal action against Bear Stearns and First Franklin.

Here is a story from Dow Jones on the conference call: Ambac: Lawyers Scrutinizing Contracts On 17 Transactions

Bond insurer Ambac Financial Group Inc. (ABK) has hired legal and forensic experts to examine 17 of its financial guarantee transactions covering residential mortgage-backed securities as performance deteriorates.
...
[David Wallis, Ambac's chief risk officer] suggested that one prime candidate for legal scrutiny is a deal with Bear Stearns Co. (BSC) it closed in April 2007. ...

Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral, a transaction that has seen an unexpectedly "rapid escalation of losses," and represents an outsized percentage of the insurer's expected credit impairment, Wallis said.

by Calculated Risk on 4/23/2008 09:17:00 AM

From the WSJ: Credit Crunch Weighs On Ambac Results

Ambac Financial Group Inc. swung into the red in the first quarter on a further $1.73 billion in collateralized-debt-obligation losses and $1.04 billion in loss provisions ...

That pretty much wipes on the $1.5 billion raised last month.

by Calculated Risk on 4/08/2008 08:01:00 PM

Via Reuters: S&P release on four U.S. mortgage insurers (hat tip Steve)

On house prices:

[W]e believe median home prices will decline 20% from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11%.

On unemployment:

When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6%, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8% in 2009, and there is considerable uncertainty in the job markets.

And the four insurers:

Standard & Poor's Ratings Services said today that it lowered its counterparty credit rating on MGIC Investment Corp. to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC) to 'A' from 'AA-'. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.

Standard & Poor's also said that it lowered its counterparty credit rating on Old Republic International Corp. (ORI.N: Quote, Profile, Research) (ORI) to 'A' rom 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.

At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI.N: Quote, Profile, Research) (PMI Group) to 'BBB+' from 'A' and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to 'A+' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.

In addition, Standard & Poor's lowered its counterparty credit rating on Radian Group Inc. (RDN.N: Quote, Profile, Research) (Radian Group) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries (Radian MI) to 'A' from 'AA-'. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.

by Calculated Risk on 4/04/2008 05:19:00 PM

From Bloomberg: MBIA Loses AAA Insurer Rating From Fitch Over Capital

Fitch Ratings cut the rating on MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.
...
Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness.

by Calculated Risk on 3/28/2008 08:01:00 PM

From Reuters: S&P cuts FGIC insurance unit's rating to junk status

S&P cut FGIC Corp by six notches to "B," five steps below investment-grade, from "BBB." It downgraded FGIC's insurance arm, Financial Guaranty Insurance Co, by six notches to "BB," two steps below investment grade, from "A."

The outlook is negative

This was expected (Fitch cut FGIC to junk on Wednesday), and FGIC will probably be in run-off (they've already stopped writing new business). Unlike insurers AMBAC and MBIA, FGIC was unable to raise new capital.

by Tanta on 3/15/2008 09:30:00 AM

Yves at naked capitalism has a great post up this morning on Character and Capitalism. I strongly recommend Yves' post and the Steve Waldman post as well.

Two anecdotes to add to the mix: back in the 90s I found myself at some manager compliance training session at my stuffy regional midwestern bank. The compliance officer was talking about the corporate policy of running credit reports on job applicants. The rationale was that, well, you don't hire people to handle other people's money all day if you have reason to believe they are personally desperate for money.

The human resources manager was there, and at that point she let out a loud uncontrollable guffaw. Challenged, she responded that yes, the HR department does order the credit reports as policy requires. They put them in the file, as policy requires, and get on with hiring people anyway. "Are you aware," she asked the compliance officer, "what we pay tellers and accounting clerks? If we didn't hire people who really needed the money, we wouldn't have anyone to hire."

A few years later I was in some meeting of the CRA Committee (Community Reinvestment Act), wherein we were examining the proposed guidelines for a low-income lending initiative. There was some resistance to the loan program based on the fact that borrowers with incomes as low as 50% of the area median could qualify. Grumbling about having to make loans to "poor people" ensued. My boss pointed out that over half the rank and file in his department who would be actually handling these loans--reviewing the loan files, preparing them for the servicing system, delivering them to custodians and investors--were paid 50% of the area median or less. Henry Ford might have figured out many decades ago that you need to pay your workers enough that they can buy your product, but that lesson was lost on the banks.

by Calculated Risk on 3/12/2008 08:47:00 PM

From the WSJ: S&P Cuts CIFG Credit Ratings

S&P lowered its ratings four notches to A+ on CIFG Guaranty, CIFG Europe and CIFG Assurance North America Inc. Less than a month ago, S&P had affirmed CIFG's AAA rating with a negative outlook, meaning a downgrade was possible.

The agency said the company's "scaled-back underwriting activity, turnover of senior staff and recent other rating downgrades ... will impinge on CIFG's ability to carry out its business plans and broaden its market acceptance."

And from MarketWatch: Moody's, S&P confirm Ambac's AAA ratings

Moody's affirmed Ambac Assurance Corp.'s Aaa rating, while S&P took Ambac Assurance's AAA off CreditWatch Negative.

Still, Fitch stuck with its AA rating and Moody's noted that it has a negative outlook on Ambac's bond insurance units.

by Calculated Risk on 3/06/2008 03:52:00 PM

From Reuters: Bond insurer CIFG loses top rating from Moody's (hat tip tj & the bear)

Moody's cut CIFG's insurance financial strength rating four notches from "AAA" to "A1" ...

Just more write-downs coming ...

by Calculated Risk on 3/05/2008 01:34:00 PM

Ambac has filed with the SEC to sell common stock and equity units.

Here is the press release: Ambac Financial Group, Inc. Announces Commencement of Simultaneous Common Stock and Equity Unit Offerings

Ambac Financial Group, Inc. (NYSE:ABK - News) (Ambac) today announced that it has commenced a public offering for at least $1 billion worth of shares of its common stock, par value $0.01 per share ("Common Stock"). Ambac has also granted the underwriters in that public offering a 30-day option to purchase from Ambac additional shares of Common Stock to cover over-allotments, if any.

In addition, Ambac announced that it has concurrently commenced a public offering of Equity Units, with a stated amount of $50 per unit for a total stated amount of $500 million. Ambac has also granted the underwriters a 30-day option to purchase additional Equity Units to cover over-allotments, if any.

by Calculated Risk on 3/05/2008 12:24:00 PM

Shares of bond insurer Ambac Financial(ABK) were halted pending news.

by Calculated Risk on 2/29/2008 10:51:00 AM

From Bloomberg: MBIA Writing `Very Little' New Business Amid Scrutiny

MBIA Inc. is writing ``very little'' new bond insurance business as borrowers balk at buying a guarantee from a money-losing company without stable AAA credit ratings.

MBIA, whose AAA ratings were under scrutiny by Moody's Investors Service and Standard & Poor's until this week, said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.

From the MBIA SEC from 10-K.

In the fourth quarter of 2007, the Company observed deterioration in the performance of several of its prime and near prime home equity transactions and established $614 million of case basis reserves for future payments. During the fourth quarter of 2007, the Company paid $44 million in claims, net of reinsurance, on seven credits in this sector. Additionally, in the fourth quarter of 2007, the Company established $200 million of non-specific unallocated loss reserves to reflect MBIA’s estimate of probable losses as a result of the adverse developments in the residential mortgage market related to prime, second-lien mortgage exposure, but which have not yet been specifically identified to individual policies. The Company expects that loss payments on its prime, second-lien mortgage exposure during 2008 will amount to a significant portion of its current reserves for such exposure.

by Calculated Risk on 2/25/2008 06:17:00 PM

From Bloomberg: MBIA Plans to Split Asset-Backed, Municipal Units

MBIA Inc., ... will separate its municipal unit from the asset-backed securities it guarantees within five years after posting record losses on subprime debt.

The Armonk, New York-based company will stop writing asset- backed securities guarantees for six months, new Chief Executive Officer Jay Brown said in a letter to shareholders today. Brown also said he has ``questions'' about the company's 2007 preliminary results released last month and hasn't yet signed off the statements.
...
``Everything we are working towards right now is centered on regaining stability,'' Brown said in the letter. ``We can expect a bumpy ride over the coming months and possibly longer.''

From MBIA: MBIA Inc. Eliminates Quarterly Dividend

MBIA Inc. today announced that its Board of Directors voted to eliminate the quarterly dividend.

Split within 5 years? Why even mention it now?

Add: MBIA Issues Letter to Owners (hat tip risk capital)

by Calculated Risk on 2/25/2008 02:41:00 PM

From Standard & Poor's: S&P Takes Additional Bond Insurer Rtg Actions (no link)

NEW YORK (Standard & Poor's) Feb. 25, 2008-Standard & Poor's Ratings Services today took rating actions on several monoline bond insurers following additional stress tests with respect to their domestic nonprime mortgage exposure.

The financial strength ratings on XL Capital Assurance Inc. (XLCA) and XL Financial Assurance Ltd. (XLFA) were lowered to 'A-' from 'AAA' and remain on CreditWatch with negative implications;

The financial strength rating on Financial Guaranty Insurance Co. (FGIC) was lowered to 'A' from 'AA' and remains on CreditWatch with developing implications;

The 'AAA' financial strength rating on MBIA Insurance Corp. was removed from CreditWatch and a negative outlook was assigned;

The 'AAA' financial strength rating on Ambac Assurance Corp. was affirmed and remains on CreditWatch with negative implications; and

The 'AAA' financial strength ratings on CIFG Guaranty, CIFG Europe, and CIFG Assurance North America Inc. were affirmed and retain a negative outlook.

The downgrades on XLCA, XLFA, XL Capital Assurance (UK) Ltd., and Twin Reefs Pass-Through Trust (a committed capital facility supported by, and for the benefit of, XLFA) reflect our assessment that the company's evolving capital
plan has meaningful execution and timing risk.

The downgrades on FGIC, FGIC Corp., and Grand Central Capital Trusts I-VI (a committed capital facility supported by, and for the benefit of, FGIC) reflect
our current assessment of potential losses, which is higher than previous estimates.

The removal from CreditWatch of, and assignment of negative outlooks on, MBIA Insurance Corp., MBIA Inc., and North Castle Custodial Trusts I-VIII (a committed capital facility supported by, and for the benefit of, MBIA) reflect MBIA's success in accessing $2.6 billion of additional claims-paying resources, which, in our view, is a strong statement of management's ability to address the concerns relating to the capital adequacy of the company.
...

by Calculated Risk on 2/22/2008 04:09:00 PM

UPDATE: The Financial Times is reporting that the banks most exposed to a downgrade are discussing injecting more capital into Ambac, and that the plan includes splitting the company.

From the Finanical Times: Banks look to bolster Ambac with $2bn

A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.

The money from the banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.

From Reuters: Ambac rescue could be announced Mon or Tues: report

Banks rescuing Ambac ... could announce a plan as soon as Monday or Tuesday, CNBC's Charles Gasparino said on Friday.

The details of the deal are still being worked out and the plan may fall through ...

by Calculated Risk on 2/22/2008 02:22:00 PM

From Moody's (login required):

On February 22, 2008, Moody's placed CIFG's financial strength ratings on watch for possible downgrade. Because of the large volume of watchlist changes resulting from this action, ratings appearing on this website may not yet reflect current information.

by Calculated Risk on 2/22/2008 12:06:00 PM

CNBC reports: Is Time Running Out for Bond Insurers?

The decision by the big ratings agencies, Moody's, Standard & Poor's and Fitch is imminent, and at least one of the raters could make an announcement sometime today.
...
[A] downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.
emphasis added

by Calculated Risk on 2/22/2008 10:50:00 AM

In the current Situation Room report (no link), BofA analysts suggest the monoline insurer breakup could lead to $30 Billion in write-downs for banks. BofA suggests further capital infusions, aimed at stabilizing the monolines at AA, would be a possible alternative.

This is the first suggestion I've seen of trying to stabilize the ratings at AA. I'm not sure how that would impact the muni bond market.

by Calculated Risk on 2/21/2008 05:13:00 PM

From Bloomberg: MBIA Advocates Severing Municipal, Corporate Units

MBIA Inc.'s new Chief Executive Officer Jay Brown, under pressure to come up with a plan to rescue the troubled company, said bond insurers must separate their municipal guarantees from asset-backed securities.

...Bond insurers should also stop issuing credit-default swaps, Brown said.

Moody's Investors Service, which has AAA ratings on the insurance arms of MBIA and Ambac, has said it plans to complete a review of the ratings by the end of the month. Standard & Poor's is also considering a downgrade of the companies' ratings.

The three largest insurers all want to split their businesses.

From the WSJ Feb 17th: Ambac in Talks to Split Itself Up

From the WSJ Feb 15th: FGIC Will Request Break-Up