Ambak "Bailout" Lands with Big Thud

This would be funny if it was not so pathetic. All these announcements of bailouts of Ambac (ABK) and banks investing cash, and splitting the company into two, etc., etc., landed with a big thud today.

Here is a 5 Minute Chart of the Action



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Yahoo Finance is reporting Ambac to Offer $1.5B in Stock and Equity.

Ambac Financial Group Inc. said Wednesday it will try to sell $1.5 billion in stock in a bid to safeguard its critical "AAA" financial-strength rating. The New York-based bond insurer plans to raise $1 billion through a public offering of common stock and an additional $500 million through the sale of equity units that would be exchangeable for common stock in May 2011. The equity unit offering is contingent upon completing the common stock offering.

Standard & Poor's and Moody's each said if the stock sale is successful, it will probably be enough for Ambac to avert a downgrade.

Since the ratings agencies began to question bond insurers' financial strength, coupled with tightening in the credit market, Ambac said it has written only "a limited amount" of business since November and almost "no new business thus far in 2008." Ensuring its "AAA" rating through the offering may help it garner new business that might have been lost because of the uncertainty.

Selling The News

Thud! Ambac closed at $8.70 down 18.84%. The Wall Street Journal asks the rhetorical question: So that’s it, huh?

Ambac Financial Group let the dogs out, announcing plans to raise $1 billion in common stock and about $500 million in equity units, and, uh, well, that was about it.

The monoline insurer also plans on getting out of a number of bad businesses that have put the company in the position it currently finds itself in — such as mortgage-backed securities, auto loans and credit-card receivables. But a decision to stop writing insurance for businesses that have already cost the company wasn’t going to assuage investors today, who were looking for more.

Ambac said it doesn’t expect to regain its triple-A rating from Fitch, but hopes to maintain the triple-A ratings garnered by Moody’s and Standard & Poor’s.

Conspicuously Missing

• Banks did not give capital to Ambac.
• Also missing in action is talk of splitting the company in two.

Ambac's Press Release

Inquiring minds may wish to take a peek at the press release.

Michael Callen, Chairman and CEO, commented on the offering, saying, “This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base.

We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement.” He added, “In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac.”

Six Month Suspension Of Business

Let me get this straight: "A six-month suspension of the structured finance business, will strengthen Ambac's capital base."

Wow. Why not further strengthen the base by suspending business for a year? How about forever? At any rate I am extremely relieved that suspending business was all part of the master plan. Otherwise, I just may have been worried about this: Ambac said it has written only "a limited amount" of business since November and almost "no new business thus far in 2008."

On second thought, I notice that Ambac has written "no new business" in 2008 but the plan was only to suspend "structured finance business". Don't worry, I am sure that can be made part of the plan if necessary.

And I am equally sure shareholders will be relieved by this statement as well “In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac.”

Time To Stop Pretending

What I said about MBIA (MBI) in MBIA Cannot Estimate January's Losses applies to Ambac as well:

It's time to end the pretending.

I am again calling out the rating agencies for their role in this mess. Please consider S&P Sniffs Horse Hockey, Calls It A Rose as well as MBIA Maintains Highest Rating, Pfizer Cut.

Splitting a rotten apple in two does not give you half a good apple.

Banks would not provide capital because they are so capital impaired themselves. Nor can Ambac be split in two because it cannot dispose of the CDO rot. The same applies to MBIA. Nonetheless, the rating agencies keep pretending the monolines are a viable business. They are not.

You cannot stay in business, by not doing business, no matter what the business is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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