Ambac Bankruptcy Unwraps More Corporate Losses

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NEW YORK – Last week’s Chapter 11 filing by Ambac Assurance, which provides insurance on billions of dollars of mortgage-backed securities held by corporate credit unions, is likely to add to the price tag of the corporate bailout, just as NCUA is trying to get its hands around a loss estimate for the failure of the five corporates.

For the growing woes of Ambac–one of a half dozen troubled bond insurers–means that the insurance coverage, known as a wrap, won’t be available as a growing number of MBS held by the corporates go into default, increasing the losses on those bonds.

“What this means is the loss estimates they (Ambac) used to write these insurance policies were obviously way off the mark and they’re not going to be able to cover the losses,” said Charles Felker, managing director for credit union bond house First Empire Securities and a former corporate examiner at NCUA.

The Ambac bankruptcy comes as NCUA is depositing some $50 billion of bonds held by the five failed corporates–U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU–into trusts then using the cash flows on those bonds to create new securities–known as NCUA Guaranteed Notes. But the financial woes at Ambac and the other major bond insurers, like MBIA, Syncora Guarantee, Financial Security Assurance and Financial Guaranty Insurance Co., means that there will be little or no insurance coverage even after the bonds have defaulted, according to Felker. In fact, Syncora and FGIC stopped paying all claims last year.

In its bankruptcy filing, Ambac listed just $1.6 billion in assets and $7 billion in liabilities making it very unlikely there will be funds to pay out the corporates’ claims.

NCUA said last week it still has no firm estimates on losses in the corporate system–projected as recently as Sept. 24 at $16.2 billion–even as it proceeds with the liquidation of U.S. Central, WesCorp, Members United and Southwest Corporate. Several people who have read the prospectuses on the NCUA Guaranteed Bonds suggested that the NCUA loss projections continue to be optimistic and much greater losses are probable.

The Ambac woes bode ill for the surviving corporates, as well, noted Felker.

The surviving corporates have tread carefully on the Ambac issue. Corporate One FCU, for example, said in its most recent financial disclosure that it has not recorded any impairment charges yet on some $30.5 million of bonds insured by Ambac. In its third quarter report published Oct. 29, Corporate One said “we have continued to place reliance on Ambac for full re-payment of all claims.”

Southeast Corporate FCU reported it owns three bonds that are insured by Ambac that could result in a loss of $2.7 million. Southeast said it continues to receive principal and interest on the Ambac insured investments and maintains the position that it will receive all accruing and future claims expected from Ambac. Therefore, no investment impairments have been recorded on the Ambac insured investments.

The troubles of the bond insurers, which once limited their coverage to stodgy municipal debt, were created when they expanded into the market for mortgage-backed bonds and other structured finance. The collapse of that market as foreclosures skyrocketed left Ambac and several competitors teetering when they were left on the hook for more coverage than they could financially handle.

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