This has got to be the definition of insane.
http://www.bloomberg.com/apps/news?pid=20601087&sid=am42D9G2zJus&refer=home
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The first-quarter net loss was $1.66 billion, or $11.69 a share, New York-based Ambac said today in a statement. The company's operating loss of $6.93 a share was more than three times the $1.82 estimated by six analysts surveyed by Bloomberg.
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Ambac staved off the loss of its AAA rating at Moody's Investors Service and Standard & Poor's by raising $1.5 billion in a March stock sale.
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The $1.5 billion sale of stock and convertible units nearly tripled Ambac's outstanding common shares to 285 million. The company this week said it's seeking shareholder approval to increase authorized shares to 650 million from 350 million.
Okay let me get this right, they lost another $1.7 billion, five times more than the market expected. They raised $1.5 billion in February so they lost more than they have raised. Wants to almost double there share count which assuming they could get $3 buck a share (bigger discounts occurred at national city) would raise just 900 million. Ambac is down 20% before the open, MBIA down about 10% and the market looks like it will open up!! NOT ONLY THAT, the financials look like they are going to open up!! That in my mind has to be the definition of insane.
One thing to note was that these insures became center stage a few days after Ambac reported earnings in February. There was a delay even though the stock was plummeting. Wall St. unfortunately may start focusing on these guys again. I would love nothing more than some permanent solution to fix these guys so the the systemic risk disappears with the rest of the market and I could become much more aggressive on individual U.S. stocks.
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4 comments:
It's weird. I can only guess that the market is desperate for the bad times to be over, to get the ball rolling again and is willing to overlook just about anything.
Maybe there is a point, after a certain length of time, at which people just cannot sustain panic, despair or fear any longer and just start to feel more positive? Regardless of the facts?
If we are all much more knowledgeable about the way the market works, if we know that there is always a big rally after a period of fear and panic (due to bad news, bad results, bad fundamentasl whatever), maybe we end up shortening the length of downturns, regardless of the true state of affairs?
If investors (primarily retail) are always having the same message drummed into them: invest for the long run, don't sell in a panic, buy when the market falls - hey presto the market never really falls? (or not for long at least).
I'm not sure I'm explaining this very well, it's kind of hard to articulate.
It does make you wonder how an investment strategy based on fundamentals would perform in that type of environment? Not very well I guess.
I understand what you are saying.
The problem is though that this type of behavior sets up for a crash. Not saying there is going to be one but something can be ignored, ignored, ignored, because of what you are describing and then all of sudden capitulation comes and everyone is heading for the same exit door.
Enough time may pass for things to work themselves out but I am not going to buy just because the market is tired of going down.
I thought the banks have been pretty aggressive in marking down their exposure to the bond insurers over the past two quarters...maybe the rest of the market has already priced in the failure of Ambac and MBIA and that's why this news is a non-event.
The market definitely thought it was a non event. If the market thought it was a non event because the banks have already marked down exposure I think the market would be wrong. Banks have been marking down exposure but my understanding it is to insurers like Security Capital Assurance and the PMI Group who are much smaller and have been downgraded long ago. I read somewhere in February that if MBIA and Ambac were downgraded two notches it would result in north of $40 billion in additional losses (I think the number was $50 but can't remember exactly). I know the banks have not even come close to writing that down in the latest quarter.
More importantly though if MBIA and Ambac failed and there was no government backstop it wouldn't be the writedown's that would destroy the banks. That would be important but it would be all the derivatives (where Ambac the counterparty who is no longer a going concern) impact that would crush the financial system.
As I said I am hesitant to call the market wrong and maybe your right. I have to consider that a possibility. My interpretation however is that the market expects the government to eventually step in and save the day hence a non event.
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