Ambac Possible Downgrade: "Death Knell" For ABK?

The big story this morning is in bond insurers. Bond insurers weak (again) today as Moody's placed Ambacunder review for a possible ratings cut. What happened? Last month Moody's affirmed the rating with a Stable outlook. They cited the higher than expected losses and the abrupt retirement of the company's chairman and CEO.

This is not good news, as Friedman Billings Ramsey noted this morning: "A rating agency downgrade would be the death knell for ABK, and merely the threat of a downgrade complicates the company's capital-raising plans even further."

More importantly, a cut in the rating of the company would also mean the ratings of the bonds they insure would almost certainly be lowered. That means the owners of those bonds would have to mark down the value of the bonds, which may lead to the final round of (painful) write downs of CDOs in some upcoming quarter.

Ambac down 14 percent, MBIA down 12 percent.

This may be the reason why there is no bounce in Merrill Lynch .Traders got pretty much what they wanted from Merrill Lynch: a huge loss of $9.8 billion, or loss $12.01 a share, and a $14.1 b writedown (about what was expected). Merrill's subprime-related losses now total $23 billion.

The losses, of course, were in the Fixed Income, Currencies & Commodities division. CEO John Thain emphasized that the majority of the other businesses produced record results and the firm has substantially strengthened their balance sheet recently. The firm has raised nearly $13 billion in capital from Asian, U.S., and other investors.

Merrill is down 2 percent, but don't be surprised to see an attempt to rally the financials today. Options expiration is one reason: there have been huge short positions taken out against financials this month, mostly done by buying puts in financial stocks and financial Exchange Traded Funds (ETFs).

These puts are now expiring--with large profits for those who bought them. Those who sold them--mostly market makers--will be forced to hand over a lot of money in the next 24 hours. While no market maker is bigger than the market, don't be surprised to see attempts to limit their losses by buying financials. We certainly saw some of that yesterday.


1) At regional bank PNC,profits of $1.07 were above expectations, but once again higher credit losses and lower commercial mortgage values hurt them. This is similar to what Citi said.

2) What's up with airlines? Yes, consolidation plays are moving them, but who would have thought Continental Airlines would post a nice (pretax) profit of $24 million last quarter? I mean, they lost $4 million the same quarter a year ago. This, despite higher fuel costs. Up 4 percent per-open.

3) Finally, note that that Baltic Dry Index fell another 6.4 percent, its eighth straight day of declines. This measures the cost of shipping dry goods overseas. It is now 37 percent off its historic high, which it hit in November.

Questions? Comments?