Ambac Financial Group Inc Posts Deceiving Earnings Increase
Author: Rob K. Blake | Date: August 6, 2008 | Filed In: Mortgage News
Ambac Financial Group Inc, one of the largest bond insurers on the hook for insuring billions worth of mortgage back securities called CDOs, posted a second quarter earnings gain today of $823 Million.
Ambac Accounting Games
However, this gain comes only after using some fancy accounting to add a $5.2 Billion gain associated with their debt securities.
An increase risk premiums on Ambac’s own debt in the second quarter decreased the value of bond guarantees, which can be booked as a gain under new accounting rules.
Add new accounting rule…stir…Presto…like magic…out comes an $823 Million quarterly profit.
The Bloomberg report notes,
“The rule was enacted for some companies last year after Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc. and Citigroup argued to the Financial Accounting Standards Board that it wasn’t fair to make them mark their assets to market value if they couldn’t do the same for liabilities. The paper profits have helped offset more than $160 billion of writedowns taken by U.S. financial-services companies in the past year as of June 1.”
Do you notice something about all those companies pushing for this deceptive accounting rule?
Yep…all heavy hitters in the mortgage backed securities market.
It seems like Wall Street not only sold deceptively dangerous loan products to unsuspecting borrowers, but then got accounting rules past to deceive investors their balance sheets were not as beat up as they really were…
Ambac Still on the Hook
Ambac is still on the hook for claims on $487 Billion in total exposure, which may not bode well for their financial future depending of future default rates, accounting tricks or not.
Ambac, MBIA and other bond insurer due to their exposure to the mortgage meltdown were all AAA rated bond issuers until they all lost their best ratings last year.
In a Bloomberg report, Rob Haines, analyst with CreditSights Inc. says, “We won’t know for sometime whether Ambac is going to be one of the long-term survivors.”
My guess is if they need to play games with the numbers…probably not.
Good Luck!
Author: Rob K. Blake
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I head up Fixed Income IR at Ambac. Please understand that Ambac did not push for the new FAS157 accounting rules that requires a company to consider its own risk of non-performance in marking its liabilities to market. In fact, as a financial guarantor that has the ability to hold its liabilities (financial guarantee exposures) to maturity, we really don’t believe that MTM of those liabilities (under FAS133) provides a fair economic view of our company. The true economic view (in our opinion) is seen through our impairment estimates that we record related to our CDO portfolio because those are estimates of what we actually expect to pay on those exposures. However, we follow the accounting rules as prescribed by FASB, good, bad or indifferent.
Also please note that your $492 billion estimate of our CDO exposure is about $430 billion too high. Our entire financial guarantee exposure is $487 billion with a little over half of that concentrated in U.S. Public Finance exposures.
Regards,
Peter Poillon
Peter,
Thanks for clarifying the exposure estimates…I corrected the post.
I did place the blame for the accounting rule changes at the doorstep of the Wall Street firms by using the Bloomberg quote…and nobody expects you not to use them.
But I think everyone should know there was a rule change…and you use it..and make up their own mind what it means.
I’m glad you came by to put in your side as well.
Thanks…
RKB
Rob, I saw the original version with the “492B in CDOs”. I must tip my hat to Peter for being so cordial in his comment.
You can download the correct information right off their web site. It is very easy to locate. Really, I don’t mean to be offensive, but did you do any research for this article?
486B includes EVERYTHING. Muni bonds, utilities, military housing… The majority of their insurance portfolio has nothing to do with CDOs or other risky nasties.
“on the hook for claims on $487 Billion in total exposure” is still a gross overstatement of the situation. If you personally owned 260B in municipal bonds, would you say that you are ‘on the hook’? That’s what your article says.
Fine if you want to write a negative article, but at least get your facts straight when you do it please.