Grim Earnings News From GMAC, MBI, ABK and AIG?

GMAC, the finance arm of General Motors that is majority-owned by the clowns at Cerberus, continues to bleed cash like a stuck pig.  GMAC's third-quarter loss widened to $2.52 billion, from $1.6 billion a year earlier.  Net revenue declined 43% to $1.72 billion.  ResCap, the mortgage lending arm, was responsible for $1.9 billion in losses for the quarter.  Curiously, these earnings numbers are nearly identical to the losses posted in July, which would lead any rational person to wonder why on earth a company that consistently loses $2.5 billion a quarter should be allowed to stay in business.  The answer lies with GMAC's bond investors, who continue to finance this money-losing venture.  But I suspect their patience for a turnaround is wearing thin.  The company stated that "substantial doubt exists regarding ResCap's ability to continue as a going concern."  In a desperate effort to curtail further losses the company is now only offering auto loans to customers who can actually afford to repay them (i.e. those with the highest credit ratings,) an idea that may have come in handy a few years ago.  GMAC has around $52 billion of bonds outstanding as of last month, with $10.9 billion that mature in 2009.  GMAC may ask bondholders to swap their investments for new debt.  Why am I experiencing deja vu?  Oh that's right, because GMAC tried the old swap-crappy-debt-for-more-crappy debt ploy back in May with ResCap and now "substantial doubts exist regarding ResCap's ability to continue as a going concern."  Perhaps the beleaguered auto-lender will have more luck becoming a bank holding company and asking for handouts from the government.  I, for one, certainly hope not.

In other bleeding-cash-like-stuck-pig news, MBIA posted a third-quarter net loss of $806.48 million due to an increase in loss reserves for its insured exposures to second lien mortgages.  The net loss included an assortment of other realized and unrealized losses on its investments.  You can read further gory details here.

Not to be outdone by its brother MBIA, Ambac lost $2.43 billion as it increased reserves for mortgage securities and derivatives.  I am still struggling with the math on how a company can lose $8.45 a share when its stock price is only $2.30, but the general implication that it sucks and has very little future is crystal clear.  Speaking of sucking, analysts had forecast a loss of 50 cents a share.  Are you finished laughing (or crying) yet?  Because there's more.  The bulk of Ambac's recorded losses of $2.71 billion in credit derivatives came from increased future loss projections on CDOs.  

The real follow-up question here is: if Ambac lost $2.71 billion mostly due to CDO losses, what does this imply about AIG's earnings for the quarter?  AIG, which every American citizen should know by now, has sold credit default swaps on over $400 billion in notional on a variety of CDOs.  The former insurance giant is set to release earnings on Monday, November 10.  I, for one, am officially quaking in my boots as to the number that AIG will post as a loss.  Furthermore, I think it will become painfully obvious with the release of its earnings that AIG will not be able to pay back the loan from the government.  Make no mistake, this is a government-sponsored orderly liquidation.  

Ambac Earnings Report Requires Interpreter

Ambac reported net income of $823.1 million or $2.80 a share, catching nearly everyone by surprise.  Even my cab driver last night said to me "I don't know about that Manny Ramirez trade, but I know that Ambac is going to post a loss tomorrow!"  After reading several accounts of Ambac's earnings announcement for accuracy's sake, I was forced to confront the reality that it must be true.  Of course, excluding a non-cash gain that the company booked due to a decline in the value of its own debt, Ambac actually lost $1.53 a share, besting analyst's estimates of a loss of 61 cents per share.  That's better.  My head has stopped spinning.  I have returned from the alternate reality universe where the worst really is over. 

Ambac Authorizes $50 Million Stock Repurchase Program

Investors in Ambac Financial have watched their investment fall off of a cliff in the past year, amid constant speculation about the bond insurer's solvency.  What does the board do to improve morale?  Authorize a $50 million share buyback, of course.  The good news is, you can buy truckloads of Ambac stock with $50 million dollars, as the stock is currently trading at around $1.35.  The bad news is, the company cannot begin to repurchase shares until the March offering of shares is completed by the underwriters.  For those who don't recall, Ambac issued 170 million shares of common stock in mid-March for $6.75 a share.  It also issued equity units with a distribution rate of 9.5% at an 18% premium to Ambac's stock price at the time.  I'm not sure what the hold-up is with the March offering (underwriters stuck with a bunch of underwater stock perhaps?), but if you bought in at $6.75 and are looking for a buyer, the company will gladly take if off your hands for $1.35.  Nice. 

Ambac CEO Claims "Worst May Be Behind Us."

In an attempt to calm investors' nerves after posting $1.6 billion in losses on $3 billion in write-downs, Ambac CEO Michael Callan jumped on the bandwagon with all of the other financial company CEOs by implying that the credit crisis was past its nadir. "The worst may be behind us," Callan stated during the company's conference call. He further clarified his point by saying "Worst is a big black bear that is chasing us so everybody RUN FOR YOUR LIVES!" This last quote is actually not true, but that should not take away from the comical nature of the CEO's actual comment. Ambac has a $400 million credit line that is currently in violation of its net worth covenants. Furthermore, the company is seeking shareholder approval to increase its shares by 350 million in order to raise cash to shore up its balance sheet. However, given that the stock is now trading at $3.50, the capital infusion may not be enough. According to the Bloomberg article, the CDS on Ambac has widened by 90 basis points to around 793 but my inside sources claim it is actually trading at 1018 right now, meaning the bond market has its doubts about Ambac's ability to remain in business.

In a related article, Ambac's lawyers are investigating the contracts on 17 transactions. The company is attempting to figure out how losses on underlying collateral with Bear Stearns that were originally projected at 10% morphed into 81.8% default rates. Sort of makes me wonder how bad Ambac's projections are on the rest of its deals. The worst is behind us? That had to have been a joke. But shareholders aren't laughing.

Ambac Posts $1.66 Billion in Losses

Ambac reported a net loss of $1.66 billion, or $11.69 a share, thus outsmarting all of those analysts who were expecting losses of about a third of that number. This is quite a feat by Ambac, considering that ABK was a $6 stock yesterday. I'm sure many companies wish they knew the secret to losing twice their market capitalization in one quarter and remaining in business. Since Ambac insures about $524 billion in bonds, this news should not be greeted with exuberance by the credit markets, although I would guess the credit markets were not expecting uplifting news out of Ambac. But can all the equity bulls who think the worst in the financial morass is behind us continue to ignore news like this?