Bond Insurer Going Down

See chart:
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=AMBAC&time=&freq=

and some perspective from this video

and article below. This is bad stuff.

Ambac Looks at ‘Alternatives’ After $3.26 Billion Loss

By MICHAEL J. de la MERCED
Published: January 23, 2008

The Ambac Financial Group, one of the largest companies that insures against bond losses, said Tuesday that it was exploring “strategic alternatives” as it announced a $3.26 billion loss for its fourth quarter.

Ambac’s shares surged more than 28 percent on the disclosure that it was in talks with “potential parties.” In Wall Street’s parlance, strategic alternatives mean, among other things, a potential sale or outside investment. Either would help ease concerns that Ambac lacks enough capital to pay claims.

Driving the company’s loss, which amounts to $31.85 a share, was a $5.21 billion write-down on its portfolio of credit derivatives. About $1.11 billion was tied to financial instruments backed by subprime mortgages.

The news reflects the continued woes of Ambac and others in the bond insurance industry. On Friday, after abandoning a plan to raise $1 billion in new capital, the company lost its most valuable asset: a AAA credit rating that allowed it to guarantee lower-rated debt.

That move by Fitch Ratings — and the threat of further downgrades by the other two major ratings agencies, Standard & Poor’s and Moody’s Investors Service — capped a week in which Ambac lost nearly three-fourths of its market value. Last Wednesday, Ambac ousted its chief executive and said it would cut its stock dividend by 67 percent.

“We view the current perceptions of Ambac’s business by both the market and ratings agencies as underestimating Ambac’s strengths and future potential,” Michael A. Callen, the company’s new chairman and interim chief executive, said in a statement. “As the market normalizes and perceptions correspond more closely to reality, the market will more accurately assess our assets and strengths.”

A sale or investment offers no guarantee of salvation, however. Last month, MBIA, Ambac’s biggest rival, sold a $1 billion stake to the private equity firm Warburg Pincus. Even after that deal was announced, the company’s shares slid another 73 percent. (MBIA shares rose 47 percent on Tuesday, largely because of a Barron’s article arguing that the company is in better financial health than Ambac.)

Until a few months ago, bond insurance was a little-known industry that guaranteed staid municipal bonds from default. The service allowed state and local governments to issue bonds to raise money in the capital markets at lower cost.

But companies like Ambac, moving far beyond their original mission, also insured hundreds of billions of dollars in debt tied to risky subprime home loans. As the market for those loans collapsed, the companies found themselves facing steep losses.

The pain suffered by Ambac and other insurers has spread far beyond the industry. State and local government bonds insured by the company have already dropped in value. Those governments may also find it more expensive to issue new debt.

Financial giants like Merrill Lynch and Canadian Imperial Bank of Commerce have also felt the ripples from Ambac’s troubles. Subprime-backed bonds issued by those firms and insured by Ambac have dropped in value, raising the prospect of even steeper losses for those banks.