The train wreck that is the bond insurance industry always provides interesting headlines. MBIA, once the sector’s leading light, on Monday reported a $728m loss for the third quarter of 2009. Ambac, its long-time rival, had reported a $2.2bn profit a week prior.
But appearances can be deceptive. Late on Monday, Ambac filed its 1o-Q. The second paragraph of that filing contained the following warning:
Ambac’s available liquidity is currently insufficient to fund its needs beyond the near term and its failure to successfully execute on its current strategies could result in it running out of liquidity in the second quarter of 2011, or potentially sooner
At least one person will find this statement completely unsurprising: JP Morgan’s Andrew Wessell, a long-time and vociferous critic of the bond insurers (so opinionated on the matter, in fact, that his handlers have been known to sanitise his commentary and ban reporters from speaking to him).
Fortunately, Bloomberg managed to get hold of a prescient research note from Wessell on November 5:
Ambac Financial Group Inc.’s bond- insurance unit may be placed into receivership, leaving no value for company’s shareholders, as the minimum surplus it’s required to maintain dwindles, according to JPMorgan Chase & Co.
The unit’s statutory capital as of Sept. 30 “could very well be in a deficit,” Andrew Wessel, a JPMorgan analyst in New York, wrote in a report today.
…
Insurance regulators in Wisconsin, which oversee Ambac, will likely take “some level of supervisory action to protect policyholders in the near term,” Wessel wrote. “We believe Ambac might be placed into receivership near term.” He reiterated his “underweight” rating on the stock.
As of June 30, Ambac’s insurance unit had statutory capital surplus of $500 million which may have been completely eroded as of the end of September, Wessel wrote. Ambac was stripped of its AAA credit ratings last year and has stopped writing new business.
In response, Ambac spokesman Peter Poillon declared:
“I don’t think there’s a basis for his comments…He’s making assumptions about our statutory filings that haven’t been completed at this point.”How about that?
(*insert cliches about the fallen mighty, and bangs and whimpers, here*)
The market reaction was clear – and brutal. Ambac stock broke the buck – closing 33 per cent lower at $0.79. MBIA dropped 27 per cent to $3.52 in sympathy.
Related links:
Ambac clings to life – FT Alphaville
S&P junks MBIA – FT Alphaville
Monoline Vertigo – FT Alphaville
The travails of the financial guarantors – FT Alphaville