Ambac Financial Group, Inc., the first monoline bond insurer to see its AAA credit rating wiped out because of ill-timed mortgage exposure, said it is pursuing "strategic alternatives" after reporting a $3.2 billion quarterly loss -- that's $31.45 per share -- on Tuesday. "Strategic alternatives" usually refer to the pursuit of a sale. From Bloomberg:
"They can't issue equity and they can't issue debt," said Robert Haines, an analyst at bond research firm CreditSights Inc. in New York. "The new CEO might be prepping the company for a potential sale."
The loss comes as Ambac absorbed a $5.2 billion write-down to its credit derivative exposures, primarily related to insuring collateralized debt obligations backed by mortgage debt. New CEO Michael Callen, however, said that both investors and the rating agencies are "underestimating Ambac's strengths and future potential." "Claim payments in 2007 were negative $2 million and we paid no claims related to our CDO of ABS portfolio." Callen said. "We believe that Ambac can realize new business opportunities in our core markets and through reinsurance while we strengthen our capital position further to maintain our triple-A ratings under S&P and Moody's and seek to regain it under Fitch." An article over at Bloomberg paints a very different picture, suggesting that many of the monolines now face a crisis of investor confidence as much as they face the spectre of holding the bag on billions of dollars worth of mortgage-backed CDOs:
ACA founder [H. Russell] Fraser says the bond insurance industry needs to do more than raise capital: It needs to restore faith in its unquestioned ability to assess credit risk ... "There's no reason for an AAA-rated bond insurer to be doing anything with subprime mortgages," Fraser says. "It's going to hurt their business because municipalities are going to ask, 'Is this insurance really worth it?" By chasing the higher profits of CDOs while underestimating the risks, the bond insurers jeopardized their basic business: insuring municipalities against default ...
That unsexy, basic business is something that I'm sure Warren Buffett will gladly stake a claim to. Disclosure: At the time this post was published, the author held no positions in ABK.