Ambac Financial, the second biggest bond insurer behind MBIA, reported first-quarter net losses of $1.7 billion or $11.69 a share. Analysts had expected a loss of $1.51 a share. Ambac insures bonds worth more than half a trillion dollars and yet has a market cap of only $351.65 million after today’s close.
Some of their losses are coming from suspect deals. Per the Wall Street Journal:
Ambac has hired legal and forensic experts to examine 17 of its financial guarantee transactions covering residential mortgage-backed securities as performance deteriorates.
During its first quarter earnings conference call Wednesday, David Wallis, Ambac's chief risk officer, said the company is examining transactions that have performed much worse than expected.
Wallis suggested that one prime candidate for legal scrutiny is a deal with Bear Stearns Co. it closed in April 2007. Another is a transaction with First Franklin.
Ambac originally projected that losses on the underlying collateral of the Bear Stearn's transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral, a transaction that has seen an unexpectedly "rapid escalation of losses," and represents an outsized percentage of the insurer's expected credit impairment, Mr. Wallis said.
Some of the factors the company will examine include loan-level document review and a review of legal documents "focusing on representations and warranties," Wallis said. "Hypotheses are being built which involve fraudulent activity in various guises."
Here is a chart from Ambac's presentation showing the losses incurred. Highlighted in yellow are the Bear Stearns and First Franklin Deals.
Mortgage delenquencies have not yet peaked and are still accelerating. The financial crisis is like an iceburg. We can see some of the losses, but the bigger question is how much future losses are lurking beneath the surface.
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