Bond Insurer Ordered By Regulators to Stop Payments

Syncora, aka SCA, was ordered by regulators to stop paying out claims, triggering a default on $18 billion in credit default swaps written on the bond insurer’s own debt. The likely payout on the CDS is estimated to be around $1 billion. However, Syncora has guaranteed more than $140 billion of bonds, mainly municipal debt and structured finance. This is the first of the bond insurers, a mini-me of Ambac and MBIA, to have been forced to cease paying claims. This clearly is not a positive sign of things to come for the other bond insurers.

Remember when buying insurance was a no-brainer? So if I buy some muni-debt, not only is it backed by government receipts but it also comes with insurance! What a great risk-free investment! Want to protect a family in case of an untimely death? I’ll just give AIG a call and get some life insurance! What if I buy a new car and it happens to be a lemon? No problem, it came with a warranty from GM, better yet Chrysler. Remember when you didn’t have to look at a company’s balance sheet to determine if it was a safe company to buy insurance from? Now, not only do you have to figure out if the company will still be solvent, but also if it’s a big enough clustersuck to be considered enough of a systemic risk to be bailed out by the government. Might as well put all your extra cash into Citigroup because it has to be the most guaranteed systemic risk around.

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. 

Moody's Keeps Bear Stearns on Review for Possible Upgrade, Officially Loses All Credibility

According to MarketWatch "Moody's said it will continue to review Bear Stearns debt for a possible upgrade." Separately, and yet completely related, Bear Stearns shareholders begrudgingly approved the firm's sale to JP Morgan Chase yesterday. Despite the close of the sale, Moody's thinks it might possibly be a good idea to upgrade the debt, but it's not entirely certain so for now, it's just going to put it on review. Whatever shred of credibility may have remained after the Financial Times reported that Moody's accidentally awarded AAA ratings on billions of dollars of derivatives because of a computer bug, has officially evaporated. In the statement released today Moody's claimed that it would like to wait until it receives more clarity on the ultimate legal structure of the Bear Stearns and JP Morgan deal. Seriously, who cares? The merger is a done deal. How can any further analysis of legal issues possibly be of use to any investors? Anyone who is trading Bear's debt at this point is probably far more in tune with the legal issues than Moody's. Wanna work on some useful analysis? Here's my top four list of things Moody's can investigate that would actually help investors:
1.) Ask for a detailed list of Level 3 assets and their prices from every highly leveraged institution. Then tell me what they are actually worth. Make sure to downgrade those that refuse to offer the information, particularly any institution with an implied government guarantee.
2.) Go through GE's balance sheet and force them to describe the $25 billion in assets that it has labeled as "other" on its balance sheet. Then tell me what they are actually worth.
3.) Take another peek at the monoline insurers. Do everyone a favor and downgrade them from AAA BEFORE they go out of business.
4.) Take a look at all the assets being used as collateral against the Fed loans being offered to primary dealers. Tell me what they're really worth and if the Fed is using an appropriate haircut.
Anyone else want to add to the list?

MBIA Posts $2.4 Billion Loss, Shocking Those Who Believed Worst Was Over

MBIA posted a loss twice as large as anticipated by analysts, as the company was forced to write-down the value of its credit default swaps by $3.58 billion. The loss was equivalent to $13.03 a share allowing MockTheMarket to honor MBIA with its coveted "We lost more money than our market capitalization in one quarter!" award. Furthermore, it pulled off this amazing feat two quarters in a row and still maintained its AAA rating. CEO Brown was optimistic, claiming "We have ample liquidity, our balance sheet is built to withstand credit stress levels many multiples of what we are experiencing now." What he didn't mention in his reassuring speech was that MBIA's share in the municipal bond insurance business had dwindled to 2.5%. This used to be MBIA's bread and butter before it ventured off into the lucrative business of granting AAA ratings to CDOs whose cash flows it didn't understand. Now the company is stuck with a deteriorating portfolio coupled with insufficient capital. It can't venture into new businesses and has lost most of its municipal insurance business to Berkshire Hathaway, a company with ample capital and a solid reputation. What does the future hold for MBIA? A tremendous amount of risk from its current portfolio and an inability to do future business. Not a combination that would tempt one to buy the stock, even at a hefty discount to its former glory.