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 afrye@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net;
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