Confidence Game - Christine Richard [142]
“How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5 billion, insure the debt of the state of California, the world’s sixth-largest economy?” Gross wrote. “That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start,” he added. The whole concept was foolish. “It is as if Barney Fife, television’s [deputy] Sheriff of Mayberry in the Andy Griffith Show, promised to bring law and order to the entire country,” Gross wrote.
Even Jay Brown marveled at the perceived role the bond insurers had come to play in the markets. In his letter to shareholders, he said, “The sheer folly of suggesting that MBIA, the largest financial guarantor, could be the linchpin holding up the market value of the global financial system has lit a bonfire under the financial press that has led to the daily speculation—or real-time, if you follow the TV networks—about our fate.”
Folly or not, that’s what everyone was counting on when, on February 29, the Ambac plan hit a snag. Before the market opened that day, Gasparino reported that the credit-rating companies had nixed Citigroup’s plan to save Ambac. The rating companies wanted more capital and had sent the bank consortium back to the drawing board. Ambac shares fell, and another abysmal day followed for the stock market, with the Dow sliding more than 300 points.
Dinallo and Spitzer continued to work the phones to drum up support for Ambac. They divided the list, with Spitzer calling Citigroup, UBS, Bank of America, and Credit Suisse. The banks could either come up with the capital now to save Ambac’s triple-A rating or come up with more capital later to offset the decline in the value of the securities they had hedged with the insurer. Ambac needed $1.5 billion, a fraction of the writedowns banks would face if the bond insurer’s rating spiraled downward.
On Tuesday, March 4, Gasparino reported that a bailout of Ambac was progressing. The news made the stock the second-biggest winner in the Standard & Poor’s (S&P) 500 Index that day. On Wednesday, Gasparino reported that Ambac might agree to a bank rescue that day. Talks with Citigroup and Barclays had continued past 10 p.m. the previous evening, a tidbit that the market found encouraging. Trading on the stock was halted by the exchange, pending an announcement expected around noon.
In a press release, Ambac said it would sell $1.5 billion of common stock and equity units to bolster its capital. The offering would be led by Credit Suisse. Others in the syndicate group included Citigroup, Bank of America Corporation, and UBS AG.
Traders on the fixed-income desk at Credit Suisse, who had helped to create the Open Source Model, which was predicting that Ambac would need much more than $1.5 billion to survive, were stunned. “We’re underwriting this?”
They were not the only ones who were skeptical. “Based on our estimate that Ambac will eventually absorb about $11 billion of losses from insured CDOs and exposures related to mortgage-backed securities, $1.5 billion of new capital at first blush does not seem like enough to fix the capital-adequacy problem,” Andrew Wessel, an analyst at JPMorgan Securities in New York, said in a research report on Thursday, March 6.
When Gasparino went on the air later that day, he said there was a backstop in the Ambac deal and private-equity investors might get involved. And it was just possible that the deal might be increased to $2 billion. He sounded out of breath. “If it blows up, if investors walk away, banks have agreed to buy it.” So it was a bailout?
Late Thursday evening, March 6, the Ambac deal was completed. The company, which started the day with a market capitalization of less than $1 billion, raised $1.5 billion. Both Moody’s and S&P affirmed Ambac’s triple-A rating.
“THE SITUATION IN the market probably couldn’t have been worse. It’s worse than I’ve seen in 40 years,” Michael Callen, Ambac’s chief executive officer, told