US Equity markets were ending last week on a down note, when rumors of an Ambac (ABK) rescue plan started circulating (via Charlie Gasparino of CNBC)
A few issues that may be getting overlooked in the initial reaction to this:
1) This is the fifth such rumor in 2008, and I’m not sure why that is. Is it wishful thinking, or have the other deals have fallen apart? If they did, was it for good reason, too?
We had the initial rumor over a month ago (Next on the Worry List: Shaky Insurers of Bonds); that was a $15 Billion dollar bailout. Then came the Wilbur Ross – Ambac rescue plan. It went nowhere fast. Another bank consortium plan came and went. Lastly, the Buffett offer, which was widely misrepresented as Berkshire (BRK’A) injecting money into the
monolines duolines, when in reality all Buffett offered to do was merely sell reinsurance to the duolines.
2) The current rescue operation is for but $3B. This small sum is intriguing — not just relative to the prior rumors. First, the duolines have potential exposure anywhere from $30 to $75 billion dollars. On top of that, the bank’s counterparty and hedging exposure has been estimated at $150B to $200B. Can $3B really solve this problem?
3) From the FT Friday: Banks to aid Ambac with up to $3bn
The banks looking at supporting Ambac include Citigroup (C), Wachovia (WB), Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level. (emphasis added)
Hence, the banks who are Part of the rumored consortium are (of course!) the ones who have the most to lose if any of the Duolines fail. This is not so much a bailout as a possible attempt to kick the can down the road. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.
What’s truly bizarre is that a dozen banks spending three large may actually be a relatively good deal for them, if it avoids a quarter trillion in writedowns.
4) Coincidence or good timing? Look who’s expected to report writedowns this week: Fannie Mae (FNM), Freddie Mac (FMC), Lehman (LEH), Morgan and Goldman Sachs (GS), and Royal Bank of Scotland.
The bottom line: Until this deal gets done and the details are better known, its simply another in a loing string of rumors. Worse yet is what it means: Banks have so much derivative exposure they are willing to throw away $3 billion to prevent the counter-parties from getting a ratings agency downgrade.
UPDATE: January 25, 2008 2:50pm
reaffirmed MBIA’s AAA rating. Markets are rallying on the news. To achieve this feat, MBI was forced to sell surplus notes at par that yielded 14% during that capital raise –t hat is way above junk bond levels. In the markets, its trading between 97-100. Note that US Govt is AAA, GE is AAA , Exxon Mobil, Johnson & Johnson, Berkshire Hathaway and Northwestern Mutual are also AAA.
Peter Boockvar of Miller Tabak points out:
"What S&P is saying is that a bond
yielding 14% in the marketplace is also AAA. It’s now a game among the rating
agencies, regulators and banks with whether the bond insurers are rated AAA or
not when they clearly are not and their securities don’t trade as they are. This
is being done in an attempt to prevent the banks from going through another
round of writedowns."
What of Ambac? Any hope of its AAA
ratings reaffirmations are likely contingent upon a deal going thru — and if it
falls apart so, do any hope of AAA ratings for Ambac.
What this really points out is how worthless
and corrupt the S&P and Moody’s ratings actually are.
Forget that the foxes are watching the henhouse, it
appears that the regulators, banks, insurers, and SEC, Federal Reserve — pretty
much anyone else you can think of — are all in cahoots with each other. Its
American Socialism at its finest . . .
Banks to aid Ambac with up to $3bn
Aline van Duyn and Ben White in New York
Fri Feb 22 19:25:37 EST 200