Sunday, February 3, 2008

Banks Are Trying to Get Together to Shore-Up Ambac

This is an interesting game to watch. The rating agencies are threatening to downgrade Ambac. Therefore, the banks are trying to decide if it is cheaper to shore up Ambac or is it cheaper to take a loss on the bonds Ambac insures. It is difficult to look good when you have to shore up a situation of your own creation. Text in bold is my emphasis. From Yhaoo:

A group of large banks has joined together to find ways to shore up Ambac Financial Group Inc, a large bond insurer battered by the global credit crunch, two people briefed on the talks said on Friday.

The stakes are high for banks, insurers and the broader economy. Bond insurers, which guarantee more than $2.4 trillion of debt, are expected to suffer billions of dollars of losses after insuring repackaged subprime mortgages. They are looking to raise capital to protect their credit ratings.

Any downgrades of insurers could force investors to sell billions of dollars of bonds, lifting borrowing costs for consumers, governments and others, and resulting in big losses at major banks.

Some of those same banks may reinsure some of Ambac's exposure, one of the people said. The group looking at Ambac has no definite time horizon for crafting a plan, the people said.

Any capital that banks use for bond insurers will strain their already creaking balance sheets. The banking industry has suffered more than $130 billion of write-downs in the last year related to repackaged mortgages and other debt, and more write-downs are expected in the coming months.

CNBC said the eight banks working with Ambac are Barclays Plc, BNP Paribas , Citigroup Inc, Allianz's Dresdner Bank, Royal Bank of Scotland Group Plc, Societe Generale, UBS AG, and Wachovia Corp.

Ambac guarantees about $524 billion of bonds, while rival bond insurer MBIA Inc guarantees $679 billion.

Since the beginning of 2007, shares of Ambac have fallen 85 percent, while shares of MBIA have fallen nearly 80 percent.

Insurers need to raise capital to keep their ratings, but raising capital is difficult now. Ambac last month cancelled plans to issue equity or convertibles in part because of market conditions.

Credit rating agencies have already taken away triple-A ratings from at least three bond insurers. Fitch last month cut the top rating on Ambac's main unit, while Standard & Poor's on Thursday cut FGIC Corp's main unit.

Moody's Investors Service said late Thursday that some bond insurers will not likely be able to boost their financial strength to levels required for a top rating, in part because the insurers are having trouble raising capital.

The rating agency also said on Thursday it may cut the top rating for MBIA's main insurance unit.

Morgan Stanley analysts said in a report on Friday that either MBIA or Ambac will likely be downgraded by more than one rating agency, probably within a month.

Regulators including New York Insurance Commissioner Eric Dinallo have been meeting with industry participants to discuss a rescue.

Dinallo said in a statement on Friday that there had been "a number of developments" in his talks regarding bond insurers. Dinallo's office said on Monday that it had hired Perella Weinberg Partners to advise on bond insurers.

Bond insurers lost big after venturing beyond the staid world of guarantees on bonds issued by cities and states and into the higher-profit world of guaranteeing bonds backed by consumer debt like subprime mortgages.

That decision backfired last year as credit markets tightened, homeowner defaults soared, and the value of those securities sank.

Many believe traditional municipal bond insurance can still be a good business. Warren Buffett's Berkshire Hathaway in late December created a bond insurer to take advantage of opportunities in the market.

On Thursday, MBIA reported a record $2.3 billion quarterly loss and said it would look for new capital. But it said it expected to retain its triple-A rating. S&P nevertheless put that rating on review for downgrade, joining Moody's.

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