Shares of Ambac Financial Group, Inc. (NYSE: ABK) are being crushed even harder today than yesterday by more than 60% to around $5.00.  The problem is that Moody’s has put it under review for a possible downgrade and the company is "assessing the impact" this notice.

• "In view of the uncertainty generated by Moody’s surprising announcement, Ambac is assessing the impact of this action on the Company’s previously announced capital plan.,,, Management remains confident in Ambac’s insured portfolio and will communicate further on these matters in its previously scheduled conference call on Tuesday, January 22, 2008…" 
  

The implications of this are more than bad because of all the counter-party transactions that could collapse.  But there could be one shot here, and that could be a man named Warren Buffett who runs a small company called Berkshire Hathaway (NYSE: BRK-A).  Ambac shares have tumbled from $96.10 over the last year and around $5.00 this market cap is merely around $550 million.  The company CEO is gone and the situation maybe nothing short of desperate.  Buffett wouldn’t rule out the possibility of acquiring a bond insurer and he’s already opening up his own bond insurer.

The question is twofold here.  First off, would Buffett bet the farm and take on a potentially ruined company even if it was just a subsidiary?  Secondly, would Buffett be able to get some government guarantees or assurances that he wouldn’t be taking on limitless liability in a unit?  We have said that many financial mergers may start being mandated rather than just preferred.  Yes it is a bit controversial, but this is something that people in the financial sector are talking about.  If Buffett does indeed come to the rescue, you can bet that the entity will be kept entire separated from the other insurance units inside the Berkshire Hathaway empire. Otherwise he’d be putting much much more at risk than just the initial investment.

When I started writing the stock was at $6.00…. now shares have dipped under $5.00.  Normally this would be a situation where maybe the stock gets halted, but we aren’t in normal times.  This is widespread panic and it is spreading into M B I A Inc. (NYSE: MBI) as well with its shares down 30% to under $10.00.  MGIC Investment Corp. (NYSE: MTG) is trading down 15% to $13.60 today.

If Mr. Buffett really does want one of these insurers, they are his for the picking.   If he sticks to his old mantra of buying only solid predictable companies, then he’s likely to just stick with his own new insurer.  The only hope is that he thinks one of these have gone way below anything cheap.

Jon C. Ogg
January 17, 2008

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