Billionaire Wilbur Ross is in serious talks to take over Ambac Financial Group, according to a media report, but broader efforts to rescue the sector will take some time, a New York state
regulator said on Thursday.
Wilbur Ross said in December he was looking at investments in bond insurers. The U.K.'s Evening Standard reported on Thursday that he is in talks with Ambac that are "serious and progressing well."
Ross hinted at some sort of move in an early week interview with CNBC ... see first video below ... though sources have told CNBC that they see a Ross bid for Ambac as atypical of his normal investment strategies ... see video at bottom.
But New York's insurance regulator said earlier on Thursday that any plan to shore up the insurers that guarantee $2.5 trillion of bonds will take time because of the complexity of the issues and the number of parties involved.
Concerns the insurers might lose their top credit ratings, forcing massive bond losses for investors and lifting consumer borrowing costs, have weighed down global stock and bond markets all week.
Bond insurers have suffered billions of dollars of write- downs in recent months and are expected to sustain more, after insuring debt hit by the subprime mortgage crisis. Many investors fear they have too little capital given their obligations.
Federal legislators are starting to take note. A U.S. House Financial Services subcommittee said on Thursday it is examining the bond insurance industry and will soon hold hearings on potential regulatory reforms.
Investigators Watching Closely
State investigators are watching the situation closely, too. MBIA said on Thursday that Massachusetts' Securities Division subpoenaed the company for information regarding bonds it insured between Jan. 1, 2006, and the present, that were issued by governments in the state.
The recent bond insurer rating downgrades and the potential for more cuts could affect all aspects of the financial marketplace, U.S. Rep. Paul Kanjorski, chairman of the capital markets subcommittee, said in a statement.
The shares of MBIA and Ambac, the largest and second largest bond insurers, soared on Wednesday on news New York State Insurance Superintendent Eric Dinallo had pressed banks to bail out the insurers.
But on Thursday, Dinallo said in a statement that "any effective plan will take some time to finalize," adding it was important to address the issues quickly. Ambac and MBIA shares dropped, but rose again in after-market trading after the Wilbur Ross report.
Write-downs are eating into bond insurers' capital and raising new capital is difficult.
Ambac, which insures about $555 billion of debt, last week scrapped plans to raise $1 billion of equity or convertibles, citing poor market conditions. Fitch Ratings promptly cut its top credit rating for Ambac's main insurance unit, raising fears that more downgrades for bond insurers were on the way.
Wisconsin Insurance Commissioner Sean Dilweg said in an interview on Thursday he is confident Ambac will raise capital.
Fears of Downgrades
Fitch on Wednesday downgraded Security Capital Assurance, which insures about $150 billion of debt, after the company was unable to raise capital.
Ratings downgrades are a huge problem for bond insurers, whose main business is to effectively turn lower-rated bonds into top-rated bonds by insuring them. If an insurer loses its top ratings, the bonds it protects are also downgraded.
Because many investors can only hold top-rated bonds, downgrades could flood financial markets with billions of dollars of municipal bonds and asset-backed securities, lifting borrowing costs for consumers, as well as state and local governments.
Municipal bonds make up about two-thirds of the bond insurance industry's portfolio, while asset-backed securities are about a third. Fears of bond insurer downgrades are already weighing on markets for municipal bonds.
New York City's borrowing costs could rise because of the bond insurers' difficulties, budget director Mark Page said. "It might cost us a little for a period of time," Page said at news conference on Thursday.
Ambac's shares fell $1.68, or 12.9 percent, to close at $11.33 on the New York Stock Exchange, but rose to $12.18 in after-market trading. The company's shares have fallen more than 85 percent from the beginning of 2007 through Thursday's close.
MBIA's shares fell $2.60, or 15.3 percent, to $14.40 on the NYSE, but rose to $14.75 in after market trading. At the beginning of 2007, they traded around $72.