Insurer Risk: What Kind of Damage Would Banks Sustain From An Ambac Down Grade?

Posted by John Carney, Jan 17, 2008, 9:57am

One of the things that is very apparent from Merrill's earning's statement is that the banks face serious counter-party risk now that bond insurers have run into trouble. Merrill took "credit valuation adjustments" of $2.6 billion related to hedges with financial guarantors on US ABS CDOs.

"These amounts reflect the write down of the firm’s current exposure to a non-investment grade counterparty from which the firm had purchased hedges covering a range of asset classes including U.S. super senior ABS CDOs," Merrill stated.

But this could only be the tip of the iceberg. The downgraded counterparty is said to be ACA. But other bond insurers, including the giant Ambac, are facing write-down risk. Last night Moody's told the market that Ambac is in serious risk of a downgrade.

According the FT Alphaville, the bank’s total exposure via credit default swaps purchased from the bond insurers for super senior CDOs is $19.9 billion, so if there are more downgrades there is a potential for even larger "credit valuation" write-downs. And that's just Merrill.

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Posted in: Ambac

Comments

Posted by inIT4the$, Jan 17, 2008 10:08AM

AMBAC is toast, down as much as 40% today

Posted by inIT4the$, Jan 17, 2008 10:11AM

scratch that, around 50% today

Posted by , Jan 17, 2008 10:30AM

why just today are you concerned about the 50% drop, this was a $100 stock like 6 months ago

Posted by inIT4the$, Jan 17, 2008 10:43AM

Not concerned about the % drop, see toast comment. They are done, forever most likely.

Not in equities is another reason.

Posted by The Explosive Thin Man, Jan 17, 2008 10:43AM

These companies are not the first to insure something where they didn't fully understand the risk. Insurers who have made this mistake in the past no longer exist.

Posted by Bulging Bracket, Jan 17, 2008 12:14PM

Love the ABK chart. It's a thing of beauty - and should have been an easy short call. http://finance.yahoo.com/q/bc?s=ABK&t=3m&l=on&z=m&q=l&c=

The 5 day chart is great - gaps a bit lower on Tuesday but stays mostly flat, gaps lower Wednesday with a modest (compared to today) decline to close at 12.97, then massive gap lower today. You know you're having a bad week when you open at 21.73 on Monday and by noon Thursday you're down 71% on the week to 6.50, which isn't even the week's low! Never mind that you were already down 66% in 3 months to start the week off!

Posted by Bulging Bracket, Jan 17, 2008 12:16PM

I do really love the writeoff that was more than the company's market cap - that's all star material there!

Posted by Calgary Schmooze, Jan 17, 2008 1:43PM

@BB - if you look at 1Y, it's a downward step function, followed by another downward step function. Or if you look at the max, there is an awesome precipitous fall from grace that turns the the 1Y step functions into a sawtooth. Fun with signal processing. Good times.

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