Ambac Clients May Receive 25 Cents on Dollar in Cash

Editor’s Note: The significance of this announcement is that the bondholders, who were insured directly by AMBAC (as opposed to the investment bankers who bought “bets” like credit default swaps) are receiving 25 cents on every dollar they funded as creditors for the funding of loan to homeowners (debtors/ borrowers).

This supports and corroborates two basic premises of this blog:

1. That the bondholders (i.e., the creditors in every securitized residential mortgage) have been paid or are covered, at least in part by insurance. Thus the allegation of a defense of payment or partial payment is confirmed. This supports the contention of the borrower that he is entitled to a FULL accounting of ALL monies relating to his obligation before any claim for default can be verified.

2. That the requirement of principal reduction is neither a gift nor any display of inequity. It is clear that principal reduction is as much a simple consequence of arithmetic as it is damages for appraisal fraud.

By Andrew Frye and Jody Shenn

March 25 (Bloomberg) — Ambac Financial Group Inc. clients will probably get about 25 cents on the dollar in cash for claims on about $35 billion of home-loan bonds backed by the insurer, the firm’s regulator said.

“Currently, my expectation is we’d be at approximately 25 cents cash” on the portfolio, with Ambac meeting the rest of its obligation by handing over surplus notes, Wisconsin Insurance Commissioner Sean Dilweg said today in a telephone interview from New York. The arrangement isn’t final until approved by a court, he said. The notes may be repaid, with regulator permission, if surplus funds remain.

Dilweg is taking over a portion of Ambac’s policies to protect municipal bondholders who count on the company’s guarantees. He halted payments on the $35 billion of mortgage bond policies and other contracts, saving Ambac about $120 million this month. That move will encourage the hedge funds, pension plans and other investors that hold the protection to negotiate with New York-based Ambac, Dilweg said.

“The only way to start negotiating is if regulatory action is taken,” Dilweg said. Investors holding securities backed by Ambac “watched our activities but every month they’ve been getting 100 cents on the dollar, so what incentive is there to come and talk to us?”

The $35 billion of mortgage-bond policies are part of the contracts seized by Dilweg’s office under the plan announced today and are separate from a group of collateralized debt obligations backed by Ambac, he said.

Counterparty Settlement

Ambac’s main unit, domiciled in Wisconsin, has offered to pay $2.6 billion in cash and $2 billion of surplus notes to settle with counterparties including banks on CDOs tied to assets such as subprime loans, the parent company said in a statement today. The notes will collect 5 percent annual interest, also payable with regulatory approval, Ambac said.

The insurer’s existing assets will be used to pay claims, Dilweg’s office said in a court filing yesterday requesting permission to take over the policies. The regulator said clients should continue to pay premiums to maintain coverage.

Ambac “maintains the assets to continue paying claims in full as they arise,” the regulator said in the filing. By offering a mix of cash and notes, the company “will not need to liquidate long-term assets prematurely.”

Ambac, created in 1971 to insure debt sold by states and municipalities, lost its top credit ratings and 99 percent of its stock-market value after expanding from its main business into guaranteeing bonds backed by riskier assets and CDOs. The company guarantees $256 billion of the $1.4 trillion in insured municipal issuance, according to Bloomberg data. The muni market totals $2.8 trillion, according to the Federal Reserve.

Shares Plunge

The company said that while it doesn’t consider the regulator’s move to constitute a default, it may consider a “prepackaged bankruptcy.”

The company fell 14 cents to 66 cents in New York Stock Exchange composite trading as of 4:15 p.m. The shares are down from as high as $96.10 in May 2007.

Ambac sold the industry’s first insurance policy on municipal debt 39 years ago, for a $650,000 bond of the Greater Juneau Borough Medical Arts Building in Alaska. The business thrived, with a handful of competitors obtaining the top AAA credit rating needed to guarantee debt of state and local governments and their agencies that seldom defaulted.

Ambac’s main unit was stripped of its top ratings in 2008 and has since seen its grade cut 17 levels to Caa2 by Moody’s Investors Service.

“At this point, it’s not a question of AAA coverage,” Dilweg told Bloomberg Television today. “It’s a question of coverage.”

To contact the reporters on this story: Andrew Frye in New York at; Jody Shenn in New York at;

7 Responses

  1. How do you think ABK will hold up long-term? I was hopeful, but now I’m a bit worried. PMI, too. RDN, too. ALL the bond insurers!

    I got into these stocks back in the summer of 2007 when I thought the market had bottomed. We all know how that story goes. I’m still in ABK, RDN, and PMI, since they’re my favorite, and since they all were trading at 20+ times where they are now.

    It’s total speculation and there’s no way housing will ever reach the levels it hit back before the bubble popped, but even “just doubling” would hardly be a blip on these stocks’ charts.

  2. Many things can provide a challenge to the “true sale” of receivables – including “Repurchase Agreements”, continued involvement of the “seller/servicer”, and intervention to support a failing SPV.

    Quite some time ago, a bank VP told me that the issue of whether a “true sale” ever occurred in these SPV conduits is certainly questionable. Likely this is part of reason for new FASB 166 and 167 which dissolves the (Qualifying Special Purpose Vehicle.)

    Point here is that securitization is the removable of receivables from on-balance sheet to off-balance sheet. Securities must be backed by current receivables – liquid – easily turned into cash (foreclosures are not liquid as process in lengthy).

    Quote from somewhere – not me.

    “A bankrupt sponsor’s creditors also could argue that the transfer of receivables to the SPV was really not a “true sale,” but rather a loan from the SPV to the sponsor that was secured by the receivables. Whether a transfer of assets constitutes a true sale, as opposed to a loan secured by a pledge of those assets, depends on the legal and economic terms of the transfer. In most jurisdictions, the intent of the seller and purchaser, and the extent to which the seller retains the risks and benefits associated with owning the receivables, are the critical elements of the legal analysis. ”

    from me

    Very often the seller was a subsidiary of the security underwriter – as was the depositor. Clearly a violation. Some SPV transactions (such as Ameriquest) were not structured this way – but the depositor was a subsidiary of the seller and the servicer – also a subsidiary – who retained an interest.

    This issue is big one. Case law is poor – as the courts have never really addressed this issue. Astute lawyer could have quite some class action, and in the process, negate foreclosures as fraudulent.

    Disclaimer – I am not a lawyer and this is not intended to be legal advise but only for educational purposes.

  3. Could anyone spell out the concise difference between a true sale,vs. receiveables financing,or pledging as collateral, if the latter two terms are the same. Also, in the Ambac article, mention is made of the bondholders given the “surplus notes” in lieu of cash payments. What do they (bondholders) do with the surplus notes? Hire a servicer to collect? If the bondholders only purchased rights to the payments made by the borrowers, and now they are to receive the “surplus notes”, then would these notes have to be indorsed or signed over to them? (sold) Or will they simply receive a lost note affadavit and assignment of mortgage for each and every note in each and every pool- this is a high-profile settlement, is there any way to track it and post updates?

  4. I think ANONYMOUS is right. I was told by a FITCH ratings analyst years ago that these deals were NEVER TRUE SALES, BUT FINANCING OF RECEIVABLES and the gray legal opinion letters stating otherwise were really, really gray.

    I think Neil is right that the accounting of ALL money be included and the key is to identify the real lender as defined in the note, not note holder, as well as ID all subrogation parties (insurers and guarantors) and the paper, electronic, accounting, and money trails. If there never was a true sale, that should be pled and the real key when the judge says well they owe money to someone should be yes, but we need to ID that someone and determine what else they have been paid since no one is entitled to double recovery and we also have claims against the holder in due course who we need to ID. Also, we have cloud on title issues as well as we are not asking you to give our clients a free home, just release the mortgage/deed and let the real LENDER step forward and prove their position and let us negotiate the payoff modification, or assumption of the note.

  5. I agree the “funders” can not be the investors, there obligation was to fund a pool of certificates (mortgages) and get paid from the money being passed through the spv.

    Don’t let them get your mind all twisted up trying to find your creditor. That note was long pushed to the side. They just needed to know it was there just to make certificates and more notes, to make service fees and upfront money before they move on to the next town.

    Remember follow the paper trail to see how many people put there hand in the cookie jar.

  6. I completely support the two basic premises stated here.

    But, I still am not seeing security investors as the “creditor.”
    They may, in my opinion, be viewed as “funders” or indirect lenders, but not a creditor – at least not as currently put forth by the Federal Reserve and TILA. Investors in mortgage securities do not invest or fund individual mortgages, they invest in a pool of receivables which simply pass on cash flows.

    I understand the premise that there were RESPA violations due to fact that the originations were table-funded and the actual creditor concealed. But it was Wall Street that funded the individual mortgages at closing – how they raise their money for funding is a separate issue. Do not think judges would like security investors being named as the creditor in counter-claims for TILA violations. What am I missing??

  7. This is a great piece of information- NOW, if we can just find out WHO they are paying- keep us posted.

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