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MBIA and Ambac Fight for Their Lives
On Friday, analysts at Citi and Bank of America downgraded MBIA and Ambac shares - to hold from buy. Skeptics might note that the move comes with Ambac stock down 94 percent over the past year and MBIA down 88 percent, suggesting that the previous "buy" call wasn't totally spot on.
MBIA and Ambac are a completely binary play right now. The 73% chance of a default in the next five years is, frankly, a 73% chance of a default in the next five weeks. Given that they can't raise new equity in this environment, and given that the ratings agencies have already shown much more forbearance than is really prudent, these companies' only real hope is some kind of white knight - and the foremost contender, Warren Buffett, has already ruled himself out by setting up shop as a competitor.
Even if MBIA and Ambac do survive, however, it's not clear that their stock is cheap at present levels, since there's no particular reason for the aforementioned white knight to bail out current shareholders who might be underwater. Ignore the rise in Ambac stock today: it's driven by technical factors and the dynamics of the enormous number of short-sellers in these stocks. The confluence of events which would make these stocks a good long-term investment seems highly remote at this point.
