Ambac Unit To Advise On Troubled Mortgage Investments
December 04 2009 - 01:24PM
Dow Jones News
When life hands you lemons, make lemonade.
Bond insurers, including Ambac Financial Group Inc. (ABK), have
been doing just that by forcing mortgage originators to make good
on soured loans in insured securities. Ambac is taking it one step
further, setting up a lemonade stand of sorts that will sell its
securities advisory expertise to regulators and other
investors.
The Ambac unit is RangeMark Financial Services Inc., a
consulting group with around two dozen employees that it put
together in July after acquiring an asset management and advisory
firm.
RangeMark will allow Ambac "to better predict, manage, and
mitigate the risks that we face," said David W. Wallis, Ambac's
president and chief executive, in August.
Bond insurers and ratings agencies got into trouble by
underestimating losses on mortgage-backed securities, particularly
those backed by second mortgages. The problem of highly rated
securities that turned out to be junk triggered a broader
re-examination of credit ratings and loss assumptions on structured
debt backed by mortgages and other assets.
In an interview Thursday, Robert Smith, RangeMark's chief
executive, called the unit a "new school organization" that will
provide advisory services and independent credit rating advice for
structured credit products, not only for bond insurers but for
other capital markets participants. He said he could not discuss
revenue projections, and an Ambac spokesman said it was still in
the early stages of development as a revenue producer.
According to a recent Moody's Investors Service report, bond
insurers have estimated that they will receive more than $4 billion
in remediation recoveries for breaches of contractual
representations in transactions they insure, particularly on
securitizations backed by second-mortgages originated in
2004-2007.
Smith said investors are also looking for advice on other asset
categories. One job for RangeMark is to help Ambac examine these
and other securities to help determine how they will perform over
the long term.
"Having a company with experience looking at third-party
portfolios and providing unbiased evaluations may help Ambac," said
Thomas Adams, an attorney at Paykin Krieg & Adams LLP who works
as a strategic consultant and expert witness on issues relating to
the financial crisis. He previously worked at bond insurers Ambac
and Financial Guaranty Insurance Co. or FGIC. "It might give them
leverage and legitimacy when negotiating with Ambac's
counterparties. Since the successful negotiation of commutations
will be critical to whether, or in what form, Ambac survives, this
might give them an edge."
In November, Ambac negotiated commutations, or cancellation, of
four credit default swap contracts that covered its exposure to
four collateralized debt obligations of asset-backed securities
with multiple counterparties that were valued at $5.03 billion.
Ambac settled the contracts for cash payments of approximately $520
million, less than the impairment Ambac had calculated on the
exposure.
RangeMark could potentially help Ambac with more deals, Adams
said. "A fresh set of experienced eyes might help spot things they
might not have recognized."
Closest rival MBIA Inc. (MBI) has also been working on
commutation talks, but could be hampered by its litigation with its
investment bank counterparties.
Ambac shares traded down 5.3% recently, to 84 cents.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com
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