Restoring Credibility to Ambac and MBIA

Readers are familiar with my opinion on the proper valuation of Ambac (ABK) and MBIA (MBI). GAAP metrics are not useful: the non-GAAP adjusted book value is the proper measure of their worth, and share prices should recover to that level over the next several years. The primary considerations that are keeping a lid on prices revolve around credibility – specifically, an intertwined set of issues between the bond insurers, their most severe critics (led by Ackman), and the rating agencies, S&P and Moody's. The purpose of this article is to present my analysis, which demonstrates that the reputation and credibility of ABK and MBI have been needlessly impugned, and to lead the investment community to a better understanding and appreciation of the quality and value inherent in these businesses.

To summarize how the present impasse arose: Ackman attacked the bond insurers, claiming they were insolvent, and was able to impair their reputations to the point where the share prices plunged and CDS spreads widened to the level of junk. The rating agencies, already suffering from self-inflicted damage to their own credibility, eventually downgraded both companies, citing not inadequate capital, but rather lack of financial flexibility as a primary concern. That was a euphemism and referred to the share price: with prices beaten down to artificially low levels the companies cannot raise capital on economic terms.