Saturday, 19 January 2008

It's all over for AMBAC

AMBAC has moved one step close to bankruptcy with news yesterday that the company's credit rating had been cut by Fitch after withdrawing a planned capital raising. From

Ambac scraps plan to raise capital by selling shares
Bond insurer loses AAA rating from Fitch; broad impact seen

Ambac Financial Group Inc. said on Friday that it's scrapping plans to raise new capital by selling equity after the bond insurer's shares collapsed in recent days.

Fitch Ratings cut the AAA ratings of Ambac's main bond insurance subsidiaries after the announcement and Standard & Poor's warned that it may do the same.

Hundreds of billions of dollars of municipal bonds and mortgage-related securities guaranteed by Ambac may now be downgraded too. That sparked concern about more write-downs at banks and brokers and added to turmoil in the muni bond market. See full story.

It was a ridiculous idea to raise capital at their current share price. The stock is down more than 90% and the capital raising would be more than the company's market cap. thus the dilutive effects on existing shareholders would be disastrous.

The credit rating was knocked down 2 notches to AA but Fitch and S&P might as well might save time and cut it to junk because that's where it is headed. The only way this can be prevented is if someone is stupid enough to want to buy it out. Warburg Pincus seems to be in the business of making stupid bets or how about Bank of America?

Then there is the possibility of a government bailout of the type Jim, the communist, I want government intervention every time my stocks go down, Cramer suggested on CNBC. Click on the image to hear Cramer's proposal.

Cramer's proposal sounds decent on the surface but it raises the whole moral hazard issue - that the government will bail out large distressed institutions at any cost. For once let the free market sought it out. Let the insures go under and open the door for Mr Buffet to walk in and set up shop. Not because he could do with the money but because you know he wouldn't take the stupid risks that have got us into the current predicament.