Ambac Financial Group, Inc. (ABK) said Wednesday morning that it lost $2.4 billion, $8.45/share, as it absorbed at least $3 billion in write-downs and costs to pay anticipated claims amid further deterioration in the U.S housing market. The quarterly loss widened a $360 million, or $3.53 a share, loss from a year earlier, and were far greater than analysts had expected — leading shares to fall more than 25 percent in early trading on Wednesday. In an investor presentation, Ambac said that second quarter RMBS trending among private-party transactions it had insured — which had initially turned upward earlier this year — has since proven to be the latest example of a “false positive” in battered mortgage securities markets. It took a $2.7 billion write-down on securities it had guaranteed, leading the insurer to also take a $2.5 billion impairment charge on high-grade CDO of ABS securities. (Mark-to-market losses don’t always involve a future expected cash payment, so Ambac’s move here to set aside $2.5 billion more on its CDOs is telling; not only for Ambac, but in terms of what auditors may now be demanding.) Much like fellow bond insurer MBIA, Ambac also reported rising losses tied to second-lien RMBS exposure, as well; the insurer set aside $607.7 million during Q3 to cover future expected losses, up from a $19.1 million one year earlier, largely due to second-lien RMBS deals. Paid claims for the quarter amounted to $182.4 million, Ambac said. Insurers like MBIA and Ambac provided the top-rated portions of private-party RMBS and related CDO deals with a guarantee that essentially was designed to serve as a proxy for the government guarantee that exists on Fannie/Freddie/Ginnie mortgage bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it — which means that increasing MBS losses have tanked insurers’ ratings, and escalated the expected amount of claim losses tied to deals they insured. Ambac expressed hope that the Treasury’s TARP program and capital purchase program would “establish a floor for housing market fundamentals,” according to its investor presentation. The insurer has asked Treasury to consider guaranteeing a portion of its structured securities portfolio, as well. Shares in the insurer were at $2.45, off almost 30 percent, in early trading Wednesday. For more information, visit http://www.ambac.com. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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