“The securitization of debt was in reality a distribution of cash unsupported by any rightful claim to it.”

EDITOR’S NOTE: Another unthinkable “counter-intuitive” part of the process of disintegration on Wall Street. AMBAC, whose business was insuring those alleged mortgage bonds that turned out to have nothing in them, is going broke. Like its competitor, AIG, it paid out billions of dollars on non-existent losses declared by deviant investment bankers on pools of assets that were entirely empty.

Neither AMBAC nor AIG should have any financial trouble at all. They accepted premiums and issued contracts with terms and conditions that were not met. Not only did the pools not contain conforming loans (using industry standard underwriting), the pools never contained anything at all. In short, the insurers, like the investors and the homeowners and then the taxpayers have been defrauded.

Neither AMBAC nor AIG have or did they ever have any liability on those contracts because the underwriters who created the securities that were insured did not fulfill the conditions of the contract for insurance. Not only did they and do they have no liability, they have an asset — a receivables from all the payments that were made under false pretenses and should be recovered. This holds true for all the insurers. It is also true for the counterparties on credit default swaps. The paperwork “mess” is nothing of the kind. It is a failure of conditions precedent for liability. If it was the homeowner making a claim on an insurance policy, coverage would be denied. The most the homeowner could hope for, and probably not get, is rescission, wherein his premiums would be returned.

The claimed “waivers” in the contracts did not waive claims based on fraud.

All of this goes to show that both Wall Street and the government is in Neverland. They steadfastly refuse to see what is right in front of them. The securitization of debt was in reality a distribution of cash unsupported by any rightful claim to it. The “lender” is an empty shell whether or not it remains in existence: it is the loan originator whose name appears on the settlement papers executed with the homeowner, which papers were recorded in the county records, unsupported by any financial transaction between the borrower and that loan originator. Thus the mortgage or deed of trust is a nullity and those who had improper access to the cash have no rights to enforce the obligation.

The transfer of the alleged loan obligations never took place because it was not documented correctly in the first place. It could not be transferred until that was done. The subsequent documents of transfer are fabrications and forgeries created long after the transaction with the borrower and long after the the “pools” had been closed out with nothing in them. Besides the cutoff date in the securitization documents, and the cutoff date in the REMIC Statute, the transfer of an obligation in default is a clear fraud on the investors who advanced the money for GOOD mortgages not BAD ones.

BOTTOM LINE: The insurance contract was purchased under contractual terms that were never fulfilled and were procured under false pretenses. The business model for bond insurance need not be in danger, unless we are willing to accept Peter Pan as the emperor of Wall Street, clothed or not. My unsolicited advice to bankers is that they reverse position, lest that haircut they rejected turn into a decapitation.

Ambac, the US bond insurer that once provided triple A guarantees on hundreds of billions of dollars worth of debt, said on Monday it may have to file for bankruptcy this year.

The move is a further blow to the bond insurance model, in which thousands of US municipalities bought insurance to get higher credit ratings on their debt. That structure now looks increasingly unlikely to survive the financial crisis.

“The fact that Ambac is close to declaring bankruptcy is significant because bond insurers were not supposed to ever go bankrupt at all,” said Matt Fabian, senior analyst at Municipal Market Advisors, an independent research company. “It is very likely that bond insurance is not going to return for municipal finance, or at least not in the model that we have known.”

Ambac’s board of directors said in a regulatory filing on Monday that it had decided not to pay interest on bonds after it was un­able to raise capital “as an alternative to seeking bankruptcy protection”.

The holding company is working with bondholders to restructure debt through a “prepackaged bankruptcy”, but may file for Chapter 11 bankruptcy before the end of the year, the statement said.

Shares in Ambac fell 50 per cent to close at $0.41.

The bond insurer has been under financial pressure since the collapse of the US housing market. Defaults on risky mortgages forced it to pay out more than anticipated on bonds linked to those mortgages. Ambac and other bond insurers had branched out into structured finance in search of higher profits than were available in their traditional business of insuring municipal debts.

Regulators in Wisconsin, the state where Ambac is registered, seized part of the bond insurer’s business in March, forcing it to suspend payments on policies linked to soured mortgages. It was done in part to protect the public finance market guarantees from the fallout of the ill-fated mortgage business.

The regulators’ plan, which relates to the operating company and would therefore not be directly affected by the holding company’s bankruptcy filing, is expected to come before a court later this month for approval. The move has been challenged by some of the policyholders of guarantees on structured bonds, such as hedge funds. The regulators declined to comment.

Assured Guaranty, backed by billionaire Wilbur Ross, remains the only active bond insurer, reflecting its limited exposure to mortgage bonds. However, it lost its last triple A rating last month.

Standard & Poor’s linked the downgrade to the lack of demand for bond insurance, which could limit “the potential for the re-emergence of a strong and vital bond insurance sector”.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: AMbac, Assured Guaranty, BOND INSURER, Wilbur Ross |