AMBAC Comes Clean & Runs The Gauntlet (ABK, MBI)

Ambac Financial Group, Inc. (NYSE: ABK) has finally come clean, but this coming clean is so brutal that it will be dirty. Below are some of the summary changes, many of which are substantial:

• AMBAC will raise more than $1 Billion in securities sales.
• It is slashing the common dividend down to $0.07 from $0.21, a drop of two-thirds.
• Robert Genader is ‘retiring’ as CEO, being replaced by Michael Callen as Chairman & Interim CEO.
• Losses are LARGER THAN THE STOCK PRICE and being put at -$32.83 EPS on an after-charges basis.
• Operating losses on an EPS are being shown as up to -$5.80 EPS.
• Its estimate of the fair value or “mark-to-market” adjustment for its credit derivative portfolio for the quarter is an estimated loss of $5.4 billion, pre-tax, $3.5 billion, after tax.
• Of the estimated $5.4 billion pre-tax mark-to-market loss, approximately $1.1 billion represents estimated credit impairment related to certain collateralized debt obligations of asset-backed securities transactions.
• It will report a loss provision amounting to approximately $143 million, pre-tax. The loss provision relates primarily to underperforming home equity line of credit and closed-end second lien RMBS securitizations.

AMBAC is actually claiming a new book value of $21.00 per share as of December 31, 2007. How many people will now try to use that number as a share price ceiling is as good of a guess as any.  Analysts were not surprisingly expecting a profit for the quarter.

Shares closed at $21.14 yesterday and initial pre-market indications had put this around $19.25 to $19.50 in early hours pre-market trading.  Shares are actually trading down under $18.00 now.  The 52-week high is $96.10.  This is actually weighing on other bond insurers and guarantors as MBIA Inc (NYSE: MBI) is indicated down 9%.

Jon C. Ogg
January 16, 2008