The group of banks working to bail out Ambac Financial Group includes private equity and other financial firms that have no exposure to the troubled bond insurer, signaling optimism that Ambac will be able to make money in the future, CNBC has learned.
As reported, the group of banks--which includes Citigroup and Wachovia--has worked out a framework to inject up to $3 billion in capital into Ambac . The bond insurer is in danger of losing its crucial triple A debt because of its exposure to risky subprime-related debt.
The banks are trying to save Ambac, as well as other bond insurers, because a ratings downgrade could force the banks themselves to write down billions more of their own debt that is backed by Ambac's insurance and current Triple A rating.
Though it's unclear the extent of the involvement by private equity and unexposed banks, the development is significant because it shows they expect to gain from investing in Ambac, not merely protect themselves from further losses.
The consortium of banks is now trying to sell the bailout plan to the rating agencies to save Ambac's triple-A rating. Rating agency approval is crucial because bankers want to make sure that Ambac isn't downgraded after they put money into the bond insurer.
Though Standard & Poor's reaffirmed Ambac's rating on Monday, the insurer is still under review and could be downgraded in the coming days until details of the proposed recapitalization are presented and approved.
The big rating agencies--which also include Moody'sand Fitch --have been widely criticized for not catching the growing debt problems at the bond insurers earlier, so it's not out of the question that they will demand more capital be injected into Ambac.
Moody's and S&P, meanwhile, have reaffirmed the Triple A rating on MBIA , the nation's biggest bond insurer.
Bond insurers got into trouble by moving beyond guaranteeing safe municipal bonds and insuring risky subprime-related debt. The resulting loses are now threatening their prized triple A rating, which they need to attract new clients. Current clients, such as the banks, would also lose the triple A rating if the insurers get downgraded, forcing further writedowns of their debt.
If an Ambac deal is reached, it would be a big victory for New York State Insurance Commissioner Eric Dinallo, who has been goading Wall Street to work out a deal for about six weeks.
Dinallo has been working on separate plans with the bank consortium that may infuse capital and provide lines of credit to shore-up the bond rating businesses at FGIC and Ambac and prevent downgrades. MBIA recently raised several billion dollars in new capital from Warburg Pincus.
But some analysts are increasingly skeptical that even with the infusion of cash, downgrades can't be avoided in the future because of the massive losses the insurers might take on their coverage of CDOs and other bonds that are packed with depressed subprime loans.
As evidence, they point to recent management changes at MBIA and other moves. Recently, MBIA announced that it wants to split its municipal bond business to shield it from the losses on its business of insuring CDOs. The move is being seen as a way to placate regulators and bond raters as a decision nears.
People inside the New York State insurance department, which has taken the lead in trying to prop up the insurers, say both MBIA and Ambac have enough assets to cover losses stemming from their insurance of depressed collaterialized debt obligations, or CDOs, held by large banks like Citigroup.
The bigger question is whether these firms can compete with ratings less than triple-A, particularly now that the bond insurance business will be focusing on covering bonds of municipal governments. Many large investors of municipal debt can only hold securities with triple-A ratings.
Meanwhile, a downgrade of MBIA and Ambac could pose big problems for the banks that hold bonds they insure. Analyst Meredith Whitney said on CNBC yesterday that the downgrades could cause writedowns of another $75 billion at the big banks.