Morning Shocker: So Ambac Really Wasn't AAA?
A: Remember the days in early 2008 when Charlie Gasparino was on the air every day with the 'bond insurer' saga and whether or not they would get downgraded from their AAA rating! The insurers adamantly backed their AAA standing and the credit rating agencies were hesitant to downgrade them even though we all knew their portfolios were garbage and the claims made on them would be tremendous. MBIA Chief told us that insolvency risks were 'without merit'; MBIA trades at $4 today. UrbanDigs first discussed the bond insurers in 2007, why it was important if they were downgraded from AAA bullshit rating at that time, the saga that ensued in early 2008 and finally the affirmation of the AAA ratings for Ambac & MBIA in late February 2008 that was good for about 400 Dow points. Today we see Ambac get cut to Junk Status - out of sight, out of mind was in full force in early 2008 as we now see beyond the garbage that was dished out to all of us when the markets were on the verge of chaos.
The reason the bond insurer saga was so important was because if some of these guys failed and/or lost their AAA rating resulting in a big hit to capital raising plans and operations, the ripple effect in the financial system would have made the problem worse - at the time our banks were forced to take billions in write-downs and this would have made the problem worse. So what did we do? What we always do, affirm that all is OK at the time and then later reveal that it was all a bunch of crap. Since the markets are forward looking, it is easier to digest the news later when it no longer is the center of the media universe. Out of sight, out of mind, the way the markets like it.
Today's headline, "S&P Slashes Ambac to Junk on Expected Losses", no doubt is not news at all! Amazing isn't it:
"Bond insurer Ambac Financial Group (ABK: 0.78 -6.02%) this week estimated statutory impairment losses on credit derivatives for its Ambac Assurance segment rose by $1.6bn to a total $4.9bn in Q209. These losses, which the firm expects to report on August 5, are tied to collateralized debt obligations on asset-backed securities, the underlying collateral of which continues to decline in performance.No shit! Folks, make no mistake about it, the ratings agencies played a crucial role in the credit boom gone bust wrapping AAA ratings on top of junk that was packaged and resold to investors around the world. Their ratings of the bond insurers was a complete farce, we all knew it, yet the truth would have rattled markets and put more pressure on the financials at a time when nobody wanted to admit how bad the problem really was. Its just one more example of how the old system worked and one more reason why it needs to be fixed.
In light of its capital troubles and the declining quality of its insured books, Standard & Poor’s on late Tuesday slashed Ambac Assurance to double-C from triple-B, effectively lowering it to junk status.
“This rating action reflects our view of the significant deterioration in Ambac’s insured portfolio of nonprime residential mortgage-backed securities and related CDOs,” said S&P’s credit analyst David Veno in a statement. “This has required the company to strengthen reserves to account for higher projected claims.”
The credit crisis we experienced developed from an amalgam of events, mainly:
a) deregulation - especially with regard to the use of leverage
b) fed mismanagement of interest rate policy
c) quantity vs quality securitization model that rewarded 'factory-like' behaviors with exorbitant fees - the 'originate + sell' model that didnt care about who got the junk MBS
d) a flawed ratings agency model that saw a conflict of interest and erroneous AAA ratings wrapped onto junk assets so they can be resold to the biggest investment pools
e) extreme loosening of lending standards / mortgage fraud - easy credit
f) explosion of exotic lending products designed with one thing in mind - allow the weakest buyer to be able to afford the most property possible
g) use of excess leverage up to 30:1 and at times 40:1; GSEs were levered even more
h) greed on a corporate and consumer level
...which all led to the disaster that we are now facing and the destruction of tremendous wealth both for the American people and our shadow banking system. Nobody wanted the party to end. This Ambac news today is not a shock and its not surprising. We knew it back in late 2007 and early 2008, yet nobody wanted to listen because of the negative ramifications that might have occurred.
This is why we must keep on asking questions and not just assume that what we are told is accurate and reliable. If we did, Countrywide would still be here today as the CEO told all of us in late 2007 that they would be profitable in Q1 of 2008. Instead, Mozilo is now being charged with fraud for failing to warn investors of the risks the company really faced. When will we learn that potential pressure on the markets should never compromise integrity, honesty, and the fiduciary responsibility of these executives to the shareholders of their company!
Posted by Trompiloco
Wed Jul 29th, 2009 10:37 AM
But the news tidbit says that Ambac's rating was lowered to CC from BBB, which means that it had already been falling from it's laughable AAA. Why would anybody pay attention now? On the other hand, now that the cheer or earnings waning, do you think that a couple of bad news (let's say, a spike in unemployment next Fri. and Ambac's admission of losses on Aug 5th) could start a leg down? or has the DOW become bullet-proofed to reality?
Posted by Noah
Wed Jul 29th, 2009 10:45 AM
Trompiloco - yes, you are right, but the point was that we all knew this 17 months ago and the ratings agencies still maintained the AAA rating until the markets were able to absorb the downgrade better; now we see what was really the end game, JUNK. It was more to make a point of the farce that we all experienced and how the markets reacted as that farce was concluded in late FEB - DOW UP 400 points for a news release of a AAA rating affirmation that was total bullshit and a company that was downgraded to junk 17 months later.
As for your 2nd question, with every rally like this we see stock prices get less and less cheap and expectations of better news ahead gets baked into the stock price. The shock value grows with each rally. If the news is disappointing, the markets will have to re-adjust. I dont know if bad unemployment news will do it because we all expect it - no shock, unless its really bad and way beyond expectations. I dont think Ambacs news will do anything to effect markets. As always, I think if we do have another leg down, the markets will quietly turn first and then the shock, whatever that may be, comes next. But with all the fiscal/monetary stimulus in the system, I wonder how big the shock needs to be to test new lows in near future. We almost need to get past the stimulus first, and that is way ahead of us.
Thats the bullet proof comment at work that you mentioned. markets have a tendency to roll over when complacency sets in, and I think we need more uumph to really get to that stage. But who the heck knows these days when markets are rigged
Posted by paul.b
Wed Jul 29th, 2009 11:28 AM
The point, as I read this post, is that the downgrade issue moved the markets for many weeks early last year and was front page headline news for most of january and february. The ratings agencies ended up maintaining the triple-A rating after weeks of BREAKING NEWS interuptions that saw Gasparino talk of rumors he heard on that day. Stocks would jump on news of a bond insurer bailout only to fall days later as talks collapsed to rescue the firms with capital infusions.
The downgrades came in steps later on. As Noah points out, now Ambac is downgraded to junk. How could this be? They should have been downgraded originally.
Posted by Noah
Wed Jul 29th, 2009 11:48 AM
This is why I bring up the ratings farce! Take a look at the upcoming TALF deals for the COMMERCIAL sector, cmbs, that we all know is getting crushed right now.
http://www.bloomberg.com/apps/news?pid=20601087&sid=app2K2WiOq0M
"Commercial property companies may sell about $3 billion of mortgage-backed bonds starting in September as part of the U.S. program to revive lending for shopping malls, skyscrapers and hotels. Only top-rated securities will be accepted and loans on CMBS purchases must be repaid within five years. The transactions would be the first new issues in the $700 billion U.S. market for commercial mortgage-backed securities since it shut down in 2008 as credit markets froze. Commercial property values tumbled and defaults accelerated. REITs turned to the stock market to raise capital to pay debt. "
So, here we go. Only top rated securities are eligible. I wonder whether the ratings on some of these CMBS are maintained at AAA, but in reality, they are not.
Posted by MeekSheep
Wed Jul 29th, 2009 07:55 PM
What? No comment about those CMBS that were downgraded to BBB and then right back up to AAA. Yes, it was only 9 of the bunch but hey! Why worry about that now...
Posted by Don Styles
Thu Jul 30th, 2009 09:03 PM
How come AMBAC kept making interest payments on its senior debt right through June, 2009?