MBIA and Ambac: the underdogs you can’t keep down

| August 8, 2008 | 0 Comments
MBIA and Ambac: the underdogs you can't keep down

If there’s one thing US analysts seem to enjoy at the moment, it’s downgrading US financials.

It’s no surprise that the very companies most actively shorting financials should then release doom and gloom analyses, undermining these further.

And in an almost tit-for-tat battle, analysts at different banks have been downgrading each other continually over the summer.

A cheap target for them is the battered monoline insurers, who have been seriously damaged by the credit crunch - especially Ambac and MBIA, both of whom lost around 90% of their market cap over the past year.

However, monolines so far have managed to make analysts look confused at best, and vindictive at worst.

Earlier this week, Ambac reported a rise in net income to $823.1 million.

And today MBIA reported a profit of $1.7 billion.

Not a single analyst saw these gains coming, but JPMorgan still managed to release a statement to the effect that “monlines are dead” first thing this morning.

For all their damage, monolines have a few things going for them:

  • 1. They actually have pretty solid income models, with little chance of running out of cash for years,
  • 2. Companies such as Ambac and MBIA have been actively reducing their liabilities,
  • 3. Both Mabac and MBIA have been working hard to rebuild subsidiaries eligible for coveted AAA ratings to return to full business,
  • 4. Both Ambac and MBIA have strong liquidity
  • 5. The insurers are still active in business,
  • 6. No one can let the monolines collapse, least of all the investment banks who have massive debts insured by them.

Of course, the picture isn’t entirely rosy, either - the original business of insuring municipal bonds has contracted massively over the past year.

And what market is left is being aggressively chased by companies such as General Re - owned by Warren Buffet’s Berkshire Hathaway. Interestingly, Buffet also owns a 20% stake in Moody’s, who aggressively damaged monoline ratings, only to later admit the downgrades lacked consistency.

So the bottom line is that monolines do have it tough.

But tough enough to destroy billion dollar corporations with secure income, reduced liabilities, and even in profit - companies which the financial markets could not possibly allow to die anyway?

Probably not.

However, kicking a company while its down seems to have become a Wall Street habit, especially while money can be made in the process.

The collapse of Bear Stearns, and the profits made on aggressively shorting it to death, certainly proved that.

The difference now, however, is that the credit crunch is no longer a vague uncertainty, but something with quantifiable effects.

Investors remain spooked by mortgage defaults, but they are no longer keen to run at the slightest hint of bad debt, because most big financial institutions have feverishly rebuilt their asset books over the past year to ensure they can survive.

So while Ambac and MBIA stand as extreme examples of damage from the credit crunch, they have taken about as much of a beating as anyone can give them - and yet they are still standing.

They may not be thriving, but they are surviving, and striving forward.

Slow giants of Wall St they may have once been, but now Ambac especially has become the financial underdog many ordinary investors want to cheer for.

After all, if Ambac and MBIA can not simply keep standing, but start walking forward, there remains hope for the rest of the financial world that the credit crunch is survivable.

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