Reggie Middleton

Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.


This should put to bed the notion that monoline insurer's books
shouldn't be marked to market. The reason why Ambac has big operating
losses is because the stuff that they insure is worth less and taking
big losses. It's just that simple. If you allowed them to keep "fake"
values on the books while the real stuff is tanking, then when the
insured losses are actually realized, shareholders will get slammed
very, very hard. If the mark to market losses are truly inaccurate,
then when things are realized, the company will be able to book a gain.
Until then...

The losses are real, and market pricing cannot be
circumvented for any significant amount of time without the perpetrator
having to pay penance.

'nuff said! (for those that ever followed Stan Lee:-) )

An interesting press release that was posted in this blog's user groups (you can click here for more on the source )...

General Growth Responds to Recent Statements in the Press and Blogs
Saturday January 19, 9:19 pm ET

CHICAGO--(BUSINESS WIRE)--General Growth Properties, Inc. (NYSE:GGP - News) announced today that it is required to respond to recent inaccurate statements and irresponsible suggestions that the Company might default on its debt obligations or file a petition for bankruptcy. Irresponsible! I hope they weren't referring to my blog. The Company would ordinarily not respond to these types of statements and suggestions, but in light of the current fragile condition of the real estate capital markets, it believes that it is now both imperative and in the best interests of its creditors, stockholders and employees to do so immediately. The Company responds with the following factual statements:
The Company is absolutely not in any danger of having to contemplate a bankruptcy filing, and the Company unequivocally has no intention of doing so. Well, this blog never mentioned the "B" word.
Since its formation over 50 years ago, the Company has borrowed and repaid billions of dollars of loans and has never failed to pay any loan upon maturity. Past performance is not necessarily an indication of future results.
Using conservative third party views of the current private market value of our real estate, there is currently at least $15 billion of equity value in excess of all of our debt and liabilities. I don't agree with this being very "conservative." More on this later... With approximately 300 million outstanding shares and equivalent operating partnership units, this $15 billion of equity value in excess of debt and liabilities translates into a value of $50 per share, more than 50% above our closing price of $32.86 on Friday, January 18, 2008. This means that management should be mortgaging thier houses in order to guy as much as this cheap stock as possible. Hmmm... Strange, our GGP Insider Trading Analysis - 2007 doesn't show this. I wonder why not?? After all, according to management, one can buy these interests in real estate for a mere 66 cents on the dollar, or less. Other experts place the value of our real estate above our debt considerably higher than $50 per share. Well then those other "experts" should be jumping the GGP share buying spree bandwagon as well. It is always most credible to put your money where your mouth is. Hey, I do it.

Conservative loan-to-property-value mortgage loans are in fact currently available to the Company for its income producing commercial properties. There is no doubt about that. It is the properties that don't produce income or are underwater that has out attention. See the charts below. As previously set forth in the Company’s press releases on January 8th and 17th, because of the strong property income for financing purposes on these properties, the Company will be able to obtain mortgage loans at conservative loan-to-property-value ratios of 50%-60%.
Newspaper stories and blogs have compared GGP to other companies or individuals that recently utilized multi-billion dollar short term acquisition loans that are coming due in February of 2008. The Company has no such multi-billion dollar loans. Let's get our semantics straight. There are no multi-billion dollar loans, are no multi-billion dollar "short term: loans, coming due in 2008. My research shows you have a pretty big tab to refinance over the next three years, starting in this year. The last material acquisition made by the Company was the purchase of The Rouse Company, which closed in November of 2004. At that time, an $8 billion four-year acquisition loan was obtained to complete the approximately $14 billion purchase. By early 2006, almost two years before it was due, the acquisition loan was repaid in full.
The Company also owns unencumbered income producing and development in progress properties that the Company believes have a value for financing purposes of at least $2.5 billion. These assets can be used through a variety of means to raise substantially more capital than could be required, even under the most “doomsday” of future possible scenarios for how the current commercial retail real estate markets might evolve over the next two years.
Despite current indications of softening specialty retail sales, our malls are well occupied pursuant to long-term leases. Taking into account actual 2007 Comparable NOI growth, and even assuming a weaker overall economy, the Company continues to expect Comparable NOI growth will average at least 5% for 2007-2009. So, you will defy the local, regional, national and global economies??? My research shows your rents are probably softening already, despite the fact you state otherwise. Now, I can be wrong, of course, but the evidence does point to the contrary.
Bernie Freibaum, Chief Financial Officer of General Growth, said, “we do not like to publicly respond to unwarranted and untrue allegations, but we must do it in order to protect the interests of our Company’s constituents. We wholeheartedly agree with Barry Vinocur?s reaction to this situation, which he published in his newsletter today. Mr. Vinocur is the highly regarded editor and publisher of REIT WRAP, a daily subscription service that is purchased by virtually all institutional investors in REIT stocks. Mr. Vinocur said that "raising the possibility" that a company might file bankruptcy, especially in today's environment, is very serious stuff. Moreover, is there any knowledgeable individual who would suggest there?s even a remote possibility that GGP might file bankruptcy??

Finally, continued Bernie Freibaum, Mr. Vinocur adds that "the editors signing off on this crap should have their press passes yanked." Well, we don't have press passes at this blog. We are investos and analysts, not reporters an editors. If we get it wrong, we lose money, not press passes. This is a new paradigm, Mr. Vinocur. It's not media, it's NEW MEDIA!!!

Now, for an official response...

Monday, 21 January 2008 05:00

Ice Skating Uphill!

Recently, someone emailed inquiring why I am so negative and wondering if I have any long ideas that I was interested in. Well, there are a few companies that I have looked at, that I think are a strong franchise. Keep in mind that this is not an advice column and I cannot and do not give advice here, hence I don't mention these companies. In addition, and even more important, I don't buy them. The macro scene globally, and particularly in the US, Europe, (and to a lesser extent, Asia) is abysmal, and it is getting much worse by the day. The trend is down, and sharply down. Why would I want to try to bottom fish or go long in a market where everything so obviously pointed downward? I liken this to trying to ice skate uphill. While technically possible, it is improbable and definitely not the best use of my talents, resources or time. A bear market can wipe out your portfolio, and if you buy in at the wrong time, will require up to, and over a decade just to break even. Look at those that bought at the top of the tech bubble. Those that bought at the top of the real estate bubble may do even worse. Most people who buy in to extreme swings to the upside (read as bubbles), usually buy in at the top, where most of the damage is done on the way down.

Let's take a look at what has happened over the US holiday weekend:

  1. ACA monoline insurer misses deadline on forebearance from creditors, may go into receivership
  2. gets its much deserved lowering of its credit rating from BAA, devaluing thousands of debt securities it insures along with it (this is a semantics game, the securities are intrinsically worth just as much now as they were last weekend, at least in regards to exposure from Ambac as a counterparty.)
  3. MBIA and several others are threatened the same as above
  4. The smaller reinsurers that back the primary are having their ceded coverage written down, some which is written down to zero!
  5. The party will really begin when everyone realizes that these guys all incestuously reinsure each other, and they are all sick.
  6. The financially engineered, off balance sheet vehicles of many corporations are blowing up.
  7. Housing inventories are at record levels.
  8. Housing prices are dropping at record rates.
  9. Despite this, most housing is as compared to incomes and income growth - thus is overpriced, even after historically record drops


  10. that, most housing is overpriced in comparison to historical rental yields.
  11. Most housing is overpriced as compared to the real cost of building and demand.
  12. We are coming off of the greatest risky asset bubble since, or even before the US Gold Rush
  13. Financial companies world wide are taking record write downs and losses, quarter after quarter ''
  14. Number 13 ain't gonna end no time soon!
  15. Credit markets are freezing up
  16. Overpriced residential real estate is not moving
  17. Overpriced commercial real estate is coming up for refi from short term loans and the market is not receptive at all
  18. There are more commercial properties with cap rates below the risk free rate than at any time that I know of.
  19. The US consumer is tapped out and spent, overloaded with debt and unable to drive the global economy at the unsustainable rate that it has over the last two bubbles.
  20. The Asian and European economies that depended on this stretch and strapped US consumer will disprove the decoupling nonsense theory and lead the world into a global hard landing.
  21. We are already in recession
  22. We are already in a bear market
  23. Believe it or not there is still a majority of positive sentiment screaming buy on the dips at CNBC and this and that stock or industry is oversold and so and so is undervalued...

I can go for some time here...

On the day we celebrate Dr. Martin Luther King's birthday...

This is the part where you should expect me to say all hell breaks loose. For those who don't follow me regularly, this is my take on the monolines and Ambac. Now, let's check the headlines... From

Ambac's Insurance Unit Cut to AA From AAA by Fitch Ratings

Ambac Financial Group Inc., the second-largest bond insurer, was stripped of its AAA credit rating by Fitch Ratings after the company abandoned plans to raise new equity...Ambac Assurance Corp. was lowered two levels to AA and may be reduced further, New York-based Fitch said yesterday in a statement. The downgrade ``reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction,'' Fitch said... Without its AAA rating, New York-based Ambac may be unable to write the top-ranked bond insurance that makes up 74 percent of its revenue. Ambac may quit the business or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York. The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac.

``This makes Ambac insurance toxic,'' said Matt Fabian, senior analyst and managing director at Municipal Market Advisors in Westport, Connecticut. And therein lies the fundamental problem. The insurance was toxic from the get-go. The Fitch change in moniker status did nothing to change this, but give us bloggers and some reporters something to type about.``The market has no tolerance for a ratings-deprived insurer.''

Moody's Investors Service and Standard & Poor's, the two largest ratings companies, are reviewing Ambac's ratings for a possible reduction. Moody's said this week that it may also cut the ratings of MBIA Inc., the largest bond insurer. This all a big fat joke. They cut ratings after a 80% drop in price and announcement of a $33 per share loss? Don't do us any more favors. Like I have disclaimed earlier, I am far from a fixed income expert, but I could have sworn that the ratings agencies advisory was aimed at being predictive, and not reactive. All they are doing is telling people how much money they lost!!!

``The likelihood is quite high the others will follow,'' said John Tierney, credit market strategist at Deutsche Bank AG in New York. ``Barring some significant development on new capital, it's just a matter of time before S&P and Moody's act on MBIA and Ambac.''... The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $100 billion of collateralized debt obligations linked to subprime mortgages, $22 billion of non-prime auto loans and $1.2 trillion of municipal debt. Buffet's stock may see a lot of demand out of this...

New York-based Merrill Lynch & Co., the world's largest brokerage, this week took $3.1 billion of writedowns on the value of default protection from bond insurers... Fitch, following its downgrade of Ambac Assurance, adjusted ratings accordingly for 137,990 municipal bonds and 114 non- municipal issues insured by the company. Bonds with underlying ratings higher than Ambac's will remain above the bond insurer's level, Fitch said yesterday in a statement...Fitch last month demanded the company raise $1 billion by the end of January. Ambac on Jan. 16 slashed its dividend 67 percent and said it would sell stock or convertible notes to bolster its capital. The plan provoked a boardroom dispute and led to the departure of Chief Executive Officer Robert Genader.

Ambac's interim CEO, Michael Callen, 67, said this week that the company planned to raise capital in ``an accelerated time frame.'' And exactly how are they going to accomplish that.

Moody's said this week that it may cut Ambac's ratings after the company forecast writedowns of $3.5 billion on subprime-mortgage securities. S&P said yesterday that it may cut Ambac's rating because its capital-raising options are ``impaired.'' I hate to say I told you so, but... The issue is now your credibility is severely damaged by making so many wrong calls to begin with, then taking so long to do something about them.

The sudden increase in scrutiny by Moody's, a month after the company affirmed the ratings, sparked tension with Ambac and MBIA. Ambac this week described Moody's decision to place its ratings on review as ``surprising.'' MBIA issued a statement yesterday, saying it had started a capital raising plan ``in good faith reliance'' on Moody's stated requirements. You guys know you weren't a AAA risk. Let's stop the shenanigans, please...

MBIA's surplus notes plunged as low as 70 cents on the dollar yesterday, indicating a yield of about 25 percent, traders said. MBIA fell 67 cents, or 7.3 percent, to $8.55 on the New York Stock Exchange, taking its decline to 48 percent this week. Now, here I am going to say "I told you so"! Actually, my words were, "wait until they start trading!". I don't know what investors were thinking went they bought these notes! Do they not have professional advisors ? If not, I will offer free access to my blog for those that need it. A quick lesson for free - stop trying to reach for above market yields, for you may be handed above market losses in return.

Ratings companies, which affirmed their assessments a month ago, are scrutinizing bond insurers to ensure they have enough capital to protect against losses. S&P this week said industry losses on subprime securities will be 20 percent more than it initially forecast. Ambac has a capital shortfall of about $400 million under the new assumptions, S&P said. Well, one of us needs to recharge the batteries in our calculators, recalibrate Excel, or something. I see billions of dollars in shortfalls... (see Monolines swoon, CDO's go boom & I really wonder why the ratings agencies are given any credibility!)

Ambac's 6.15 percent bonds due in 2037 have plunged by 25 cents on the dollar this week to 35.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield has soared to 17.6 percent from 10.5 percent and the extra yield investors demand over government securities with similar maturities has widened 7.2 percentage points to 13.4 percentage points. And Moody's considers this a AA risk!!! Can you imagine what they would mean by the term JUNK!

Prices for credit-default swaps that pay investors if MBIA can't meet its debt obligations imply a 71 percent chance it will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contacts on Ambac imply 72 percent odds. Hey, isn't that what I said in the links above???

Contracts tied to MBIA's bonds have risen 10 percentage points the past two days to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.... Credit-default swaps on Ambac, the second-biggest insurer, rose 11.5 percentage points to 26.5 percent upfront and 5 percent a year yesterday, prices from CMA Datavision show.

Ambac agreed to guarantee almost $200 million of bonds sold so far this year, or 6 percent of the market for new insured issues, according to data compiled by Bloomberg. Ambac's market share was 22.5 percent as of Sept. 30, 2007, according to a Dec. 13 report from Bear Stearns Cos. In a few days I will illustrate the relationship between Bear Stearns, Ambac, and Mr. & Mrs. CounteryParty Risk.

So, after all of this, what comes next??? Is this the part where you expect me to say, "All hell breaks loose!". Well, not all hell, but I think some companies may find just a taste of it...

Here is the GGP
analysis, 38 pages long, but chocked full of info, analysis, and
understanding of the CRE market and GGP in partifcular. Review this
report, and compare it to what you recieve from your sell side bank or
brokerage. I am anxious to hear your feedback. Blog members can download it here:

pdf GGP Financial Analysis and Valuation Opinion - Release Candidate 2 (923.66 kB 2008-01-19 02:48:23) .

Excerpted from the Summary:

General Growth Properties (GGP)
seems headed for a difficult operating environment in the wake of deteriorating
economic fundamentals in US and the company’s huge financial debt liability. We
believe that while operating cash flows would get impacted by lowering
commercial real estate rentals in the US, increased interest burden off
tightening lending standards by large financial institutions amid concerns over
incremental exposure of the structured securities to the securitized loan
crisis would weigh on the company’s near-to-medium earnings. The problem could
get aggravated with rising losses from probable foreclosure of mortgages on
some of GGP’s prime but high leveraged properties, in our view.

Key Points

Commercial real estate rentals headed southwards: With US
recession looming large and increasingly being pushed by a slowdown in US
consumer spending, lower-than-expected US retail sales in 4Q2007 and rising
unemployment rate, demand for commercial real estate is expected to slow down,
creating downward pressure on the commercial real estate rentals. US retail sales
for December 2007 declined 0.4% over November 2007 levels, and unemployment
rate rose to 5% in December, the highest level since 4Q2005. The
near-to-medium-term outlook doesn’t present a favorable trend in the commercial
real estate rentals amid weakening macro-economic indicators in the US.

Refinancing challenges for GGP’s huge debt liability
amid tightening credit market
As of September 30, 2007, GGP had an
outstanding debt of approximately $24 billion, of which $2.6 bn and $3.3 bn is
due for payment in 2008 and 2009, respectively. By 2011, more than 70% GGP’s debt
(approximately $17.6 billion) is scheduled to be repaid, which would be
possible only through the refinancing option. Following the US sub-prime
meltdown in mid-2007, the credit market has squeezed significantly. With
tightening of lending standards in the global credit market, it looks extremely
difficult for GGP to refinance its huge debt liabilities. Any further
deterioration in the capital market conditions, impairing GGP’s ability to
re-finance its debt obligations, could significantly jeopardize the company’s
re-development plans. Consequently, GGP could be forced to foreclose mortgages
on some of its prime, but highly leveraged properties. Alternately, to avoid
foreclosure GGP may be forced to sell assets in a period of tight liquidity,
hence lower aggregate sales values for those properties which would have
fetched a significantly higher price just a year earlier.

Rising interest burden: As the financial
performance of large financial institutions including Merrill Lynch, Citigroup
and JP Morgan is being impacted by huge sub-prime losses and the market is
adjusting their valuation (demonstrated byin the rapid decline in their share
price in last one month), these institutions have become more selective in
lending funds to consumers and the corporate world. This, in our opinion, would
negatively impact GGP’s ability to negotiate with large banks and credit
institutions as lenders get more conservative and impose stringent lending
conditions such as a low level of loan-to-value (LTV) ratio. We expect the
effective interest rate of company’s debt to rise over the present levels as
the company starts refinancing its debts due for repayment in next couple of
years. With cash flow from operations expected to rise at a moderate level and
interest rate soaring to extremely uncomfortable levels, GGP might need a
refinance facility to refinance its interest liability. This could result in a
very tight operating environment for the company especially in the absence of
any near-to-medium-term favorable drivers in the US real estate sector. The
company’s management has not exhibited, in our opinion, the ability to
outperform in a tight operating environment. The requisite margin for error
needed to see this company profitably though the next 8 quarters is just not

Thursday, 17 January 2008 05:00

As was warned in my previous monoline posts...

Back in October/November, I wrote a comical critique of MBIA and the big three ratings agencies. In it, I noted how absurd the relationship between MBIA and its reinsurer was, considering it was formed specifically to insure MBIA debt, holds a silly level of concentrated risk, and worse of all - is owned (17%) by MBIA itself. Well, finally I got someone to read my blogLaughing.

In my November writeup (from October research notes), I stated:

Relation between MBIA and Channel Re

Channel Re is a Bermuda-based reinsurance company established to provide 'AAA' rated reinsurance capacity to MBIA. Renaissance Re Holdings Ltd, Partner Reinsurance Co., Ltd, Koch Financial Re Ltd and MBIA Insurance Corp are the investors in Channel Re. MBIA has a 17.4% equity stake in Channel Re and seeded Channel Re with the majority of its business. Channel Re has a preferential relationship with MBIA.

Channel Re has entered into treaty and facultative reinsurance arrangements whereby Channel Re agreed to provide committed reinsurance capacity to MBIA through June 30, 2009, and subject to renewal thereafter. Channel Re assumed an approximate of US$27 bn (par amount) portfolio of in force business from MBIA Inc and has claims paying resources of approximately US$924 mn. (source Renaissance Re 10K. Swapping Paper Losses Channel Re is insulated against huge losses because of adverse selection in terms of pricing and risk on the assumed portfolio of MBIA. The agreement between the Channel Re and MBIA protects channel Re against any major losses. This financial reinsurance scheme smells a little fishy.

Is MBIA dumping mark to market losses on Channel Re through reinsurance contracts?

The SEC and the NYS Insurance Dept. thought so. In addition, there is overlapping risk retained through the relationship - MBIA has an equity investment of 17.4% in Channel Re. Channel Re assumes 52.37% of the total par ceded by MBIA of US$74 bn. The total par ceded not covered through reinsurance contracts due to the equity investment of MBIA in Channel Re is US$6.7 bn. Thus, there is a little under $7 billion dollars of risk that many think MBIA is covered for that it really is not. Then there is the case of diversity of Channel Re's portfolio. I have a slight suspicion that MBIA's business makes up much too much of it to be considered well diversified. Rennaisance Re, the majority owner, has also come clean admitting that Channel Re has a very high exposure to CDO losses and mortgage backed securities. Uh oh! This admission came from the extreme losses Channel Re took last quarter due to mark to market issues for mortgage backed paper. Again, is MBIA doing the old financial reinsurance scheme that was outlawed not too long ago? My gut investor's feeling tells me...For those not familiar with the reinsurance game, here is a primer on financial reinsurance.

Now, today and nearly three months later) from Reuters:

Bermuda reinsurers RenaissanceRe Holdings Ltd and PartnerRe Ltd said on Wednesday they will write off 3-year-old investments in Channel Re, a reinsurer formed solely to do business with MBIA Inc , the world's largest bond insurer.

The announcement comes after Channel Re notified the companies that fourth-quarter losses stemming from its business with MBIA are expected to exceed its shareholders equity.

RenRe said its investment in Channel Re carried a value of $126.7 million at the end of September. PartnerRe said it would take a $74 million fourth-quarter charge, equal to about $1.31 per share, to write down its investment.

Reinsurers effectively insure other insurers, spreading the risk of losses among more than one party.

Channel Re expects $200 million in credit impairments from a $3.3 billion mark-to-market charge at MBIA, according to Partner Re's statement.

David Lilly, an outside spokesman for RenRe, declined to comment further on the Channel Re development. PartnerRe could not immediately be reached for comment.

Rising defaults in mortgage-related bonds have threatened to wipe out a significant amount of capital for bond insurers such as MBIA, putting ratings under threat of downgrade.

And dropping like a rock. There were actually professional investors trying to go long on this stock. Amazing. It is just below $5 now, down from $21 last week and $66 dollars in October. What a phenomenal short play for those that were aware of the real fundamentals. The entire monoline sector is bleeding scarlet red. This is going to spread quickly into the other sectors that I follow. I may need to hire more analysts!


From CNBC:

Ambac Possible Downgrade: "Death Knell" For ABK?

The big story this morning is in bond insurers. Bond insurers weak (again) today as Moody's placed Ambac under review for a possible ratings cut. What happened? Last month Moody's affirmed the rating with a Stable outlook. They cited the higher than expected losses and the abrupt retirement of the company's chairman and CEO.

This is not good news, as Friedman Billings Ramsey noted this morning: "A rating agency downgrade would be the death knell for ABK, and merely the threat of a downgrade complicates the company's capital-raising plans even further."

More importantly, a cut in the rating of the company would also mean the ratings of the bonds they insure would almost certainly be lowered. That means the owners of those bonds would have to mark down the value of the bonds, which may lead to the final round of (painful) write downs of CDOs in some upcoming quarter.

Ambac cnbc_quoteComponent_init_getData("ABK","WSODQ_COMPONENT_ABK_ID0ENF15839609","WSODQ","true","ID0ENF15839609","off","false"); down 14 percent, MBIA cnbc_quoteComponent_init_getData("MBI","WSODQ_COMPONENT_MBI_ID0ELCAC15839609","WSODQ","true","ID0ELCAC15839609","off","false"); down 12 percent.

This the full rundown on the insurers, can be found here: Insurers and Insurance and this story - Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility.

This is from MBIA's recently published 8k. If you have not done so already, it is strongly recommended that you read the November blog post: Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton.

Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

On January 16, 2008, MBIA Insurance Corporation (“MBIA”), a wholly-owned subsidiary of MBIA Inc. (the “Company”), issued $1.0 billion principal amount of Surplus Notes due January 15, 2033 (the “Notes”) with an initial interest rate of 14 percent until January 15, 2013 and thereafter at an interest rate of three-month LIBOR plus 11.26 percent. As a point of reference:

London interbank offered rate, or Libor

Latest Wk ago High Low
One month 3.98938 4.37063 5.82375 3.98938
Three month 3.95125 4.44250 5.72500 3.95125
Six month 3.79375 4.26250 5.59500 3.79375
One year 3.42375 3.86438 5.50656 3.42375

The Notes were issued pursuant to the Fiscal Agency Agreement, dated January 16, 2008 (the “Fiscal Agency Agreement’), entered into between MBIA and The Bank of New York (“BONY”), as fiscal agent (the “Fiscal Agent”), in an offering exempt from the registration requirements of the Securities Act of 1933, as amended.

The Notes are subordinate in right of payment to all existing and future debt issued, incurred or guaranteed by MBIA, all existing and future claims of policyholders and beneficiaries and all other creditor claims which have priority over claims with respect to the Notes under New York insurance law, other than any future surplus notes or similar obligations. Each payment of interest on or principal of the Notes (including upon redemption) may be made only with the prior approval of the New York Superintendent of Insurance and only out of surplus funds available for such payments under the New York Insurance Law.

MBIA has the option to redeem the Notes in whole or in part on January 15, 2013 and the interest payment date occurring in January of each fifth succeeding year thereafter at a redemption price equal to the principal amount of the Notes to be redeemed together with any accrued and unpaid interest to the redemption date, and on any other date at a “make-whole” redemption price set forth in the Notes.

The Notes do not include any restrictive covenants.

In the event of MBIA’s rehabilitation, liquidation, conservation or dissolution, the Notes will immediately mature in full without any action on the part of the fiscal agent or any holder of the Notes, with payment thereon being subject to the satisfaction of the conditions to payment described herein.

In no event shall the Fiscal Agent or any holder of the Notes be entitled to declare the Notes immediately mature or otherwise immediately payable.

The Bank of New York has from time to time engaged in, and will continue to engage in, banking and other commercial dealings in the ordinary course of business with MBIA and its affiliates. The Bank of New York has received, and will continue to receive, customary remunerations with respect to these transactions.

From my second blog post on MBIA (the Scary Halloween Story) and the monolines dated Tuesday, 13 November 2007...

Wednesday, 16 January 2008 05:00

Ambac Management Should Read Blogs More Often

I was going to post an update on the Bear Stearns and GGP work, but since there was such adverse price action in Ambac stock I decided to follow up on that - again. So, here we go. If you are new to the blog be sure to click, follow and download all the links. They are worthwhile. If you are a regular to my monoline musings, at least download the following pdf link. It is new, and worth a quick reading. Feel free to email it and pass it around as well. I annotated a FAQ directly off of their site.

From the FAQ about 2 1/2 months ago

See first line of page 2 here: pdf ABK FAQ 12/26/07 - Reggie Annotated.

Question Category
Does Ambac have any plan to reduce the amount of its dividend? LIQUIDITY
Ambac does not currently anticipate reducing its common stock dividend.
Updated as of 11/8/07

From this blog author on 11/28/07: Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion of Equity! -

Alternatively, we have calculated the provisioning for losses that Ambac will need to make every year on the basis of the anticipated losses that the company will have to pay in coming years. In doing so we have assumed that the 85% of the premium written from 2007 onwards (excluding 15% as underwrting expesnse) will be transferred to the loss expense reserve every year. The loss reserve uptill 2007 is taken from comapny's balance sheet. The losses have been calculated on the basis of various default probabilities assummed in Strucutred Finance, Direct Subprime RMBS and Consumer Finance portfolios. We have assumed a duration of 5 years to spread the losses on various vintages over the coming years. We anticipate the company will have to create a provisoin of $ 6.8 billion under the base case scenario. That;'s about $67 per share, they are halfway there already with $33 per share announced to be expected today. Mayhap someone from this blog should invite the Ambac management team to register...

I'll make this one quick and clean. From the blog post dated Thursday, 29 November 2007 - Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity!:

"The calculations in this analysis are only estimated losses in 4 insured categories (of many, they are enough to generate significant losses). I am expecting higher losses in Public Finance as well due to the loss of property tax revenues (lower tax base) and income tax revenues led by housing value declines and loss of corporate revenue and jobs, respectively. Many municipalities created huge budgets during bubble times (like everyone else) and failed to prepare for the bubble to burst. Now unfunded services run rampant. The shortfall will have to be covered somewhere, and default on debt service is not out of the question.

In the base case scenario created, we expect the company to report losses to the tune of $8 billion+ in its Structured Finance, Subprime RMBS and the Consumer Finance portfolio. This loss will wipe out the company's remaining equity and it will need to raise an additional $2 billion in order to function as an ongoing concern. Moreover, we think the company will need to reinsure a higher percentage of its portfolio in order to transfer risk and free up capital."

The ironic thing is that this particular post encompassed an awful lot of research and calculation, but was derided by many as being too tabloidal and not credible - despite the fact that this post and the three that followed it on Ambac contained more data and analysis (over 80 pages worth) than any Ambac commentary I have seen freely offered on the web to date, save Ackman's Pershing presentation. Two things of note here: 1) the majority are usually overly optimistic at the onset of a bursting bubble, and 2) nothing takes the place of good 'ole fashion, thorough fundamental analysis. As of Jan. 8th 2008, Ambac has previously undisclosed muni problems and has had to go for additional reinsurance. It appears the post is rather prescient in light of the following...

From, January 8, 2008:

Wells Fargo & Co. put out a little notice dated Jan. 2 in its role as trustee on a bond issue sold in 2000 by the director of the state of Nevada, Department of Business and Industry.

``The Bonds are scheduled to pay principal and interest in the aggregate amount of $19,013,846.88 on January 1, 2008,'' says the Notice, which continues: ``However, amounts available in the 1st Tier Debt Service Fund and the 2nd Tier Debt Service Fund are insufficient to pay all amounts of principal and interest coming due on that day.''

The trustee goes on to report that, in order to make the Jan. 1 debt service payment, it dipped into the debt service reserve funds, taking $1,620,907.02 from the First Tier fund and $762,896.30 from the Second Tier fund.

Withdrawing money from the reserve funds is never a good sign; depending upon how the issuer defines ``default'' in its documents, it may even signify a so-called event of default. Not to worry, bondholders -- even if the trustee draws down all of the reserve funds -- the First Tier bonds are insured!

By Ambac Financial Group Inc.

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