Ambac's Bailout Shows Little Faith

by Colin Gustafson
Tue, 26 Feb 2008 at 9:34 AM

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A troubled bond insurer, Ambac Financial Group Inc., may be inching closer to a deal that could salvage its top-notch credit rating, but a skeptical blogger, Yves Smith (Naked Capitalism), writes that the proposed rescue plan is a token gesture that does little to help its chances for survival.

The blogger's skepticism comes two days after Ambac reportedly started talks with a group of banks on plans to raise about $3 billion of capital to forestall a rating downgrade. Such a rating cut would undermine Ambac's ability to guarantee debt.

Yesterday, the blogger said the plan is fraught with concessions that disclose just how little faith the banks have in Ambac's future.

The deal, he writes, "is a big vote of no confidence."

Why? For starters, instead of agreeing to buy equity in Ambac, the banks appear to have required the insurer to raise billions of dollars in new shares on its own, then agreed to buy up all of the remaining stocks that the insurer fails to sell to shareholders.

This deal could signal one of two possibilities: Either enough of the banks "have taken deep enough write-downs that they don't think they have much at risk or they believe this rescue will be inadequate."

Rather than offering a $500 million credit line, the banks appear to have required Ambac to sell $500 million in debt. For the banks, the sum is "peanuts," the blogger writes. "But they aren't even willing to take that risk. They are instead making Ambac raise the dough itself, on what is sure to be very costly terms. ... This precedent of offering only token support will make it easier" for the banks to do "little or nil next time."

SLAPPING DOWN IDEA OF HOUSING 'SLIP' Hours after the National Association of Realtors described the decline in existing home sales for January as a mere "slip," a market strategist, Barry Ritholtz, dished up a few choice words of his own to describe the downturns in the housing market.

"Plummet, plunge, nose-dive, crash, tumble or freefall might work," Mr. Ritholtz wrote (bigpicture.typepad.com/). "But 'Slip?' Gee, that doesn't quite capture the true essence of the data."

In a press release esterday, NAR noted a 0.4% drop in the pace of existing home sales across America in January 2008 — a "slip" that marked some of the worst declines in home sales since the Great Depression of the 1930s, analysts said.

Mr. Rithiltz argues that the NAR's emphasis on a 0.4% drop fails to show the broader — and bleaker — picture of the housing slump on a local level. In the Northeast, for instance, existing home sales in January 2008 were 25.7% below the level in January 2007, even as the region's median home price rose 3.1% from last year, NAR's data show.

"Delve beneath the national average into the details," Mr. Ritholtz writes, "and you find all manner of ugliness."

	HOUSING SALES A chart posted on The Big Picture blog shows that existing home sales in America declined in January 2008, despite three months of lowering mortgage rates. (Credit: ECONODAY)