Ambac Financial Group, Inc. (ABK)

XMFJordan (80.36) Submitted: 12/04/07 8:06 PM : Start Price: $26.53 ABK Score: 77.36

Let me tell you a little tale about insurance for financial products.

First, you have the insurance company. This company rates risk, writes insurance, helps to improve credit ratings (taking that AA to AAA), and pays dividends to its holding company.

The holding company (in this case Ambac Financial Group, Inc.) collects dividends, attempts to squezze as much as possible from the insurance company, and trades on a stock exchange.

Now, anyone can write an insurance policy on anything. And they can charge whatever they like for it. Of course, the less they charge the more business they have.

In the beginning, this business is wonderful. You are essentially printing money. But like money, the real test comes when you need backing for that money.

In the case of Ambac (and MBIA), there is no there there. This company doesn't have the reserves or capital base to cover even a small loss in the financial products it insures.

And there are a lot of them that are in trouble. From CDOs and SIVs to bonds, etc., Ambac has billions of dollars of risk on (and off) its books.

And the only asset Ambac has is its credit rating. In the near future, once it starts taking the write downs it should be, Ambac is going to find itself needing to put up more capital as it is called upon to meet a "rating agency margin call."

But there isn't any capital to put up. And once it can't put up additional capital, it won't have anything to sell. If you thought the 75% drop was quick and huge, just wait and see what will happen when the "rating agency margin call" comes.

This one - along with MBIA - is going to zero.

Don't late anyone tell you that this one is too big to fail. If there is something which is too big to fail, it would be the insurance company. The holding company isn't important.

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