Profits Surge as Declared Losses Vanish: Are the defaults real?

And THAT is why you are entitled to compel discovery, compel answers to your QWR, DVL and other requests. If the losses were not real, if the pools were marked down solely on the say-so of the financial institutions that created them, if the default rate was really much lower than the declared defaults, if AMBAC, AIG and others made payments on those pools, and if the investors, as the creditors in the loan transactions received payments directly or indirectly (through their agents) then some part of those payments were allocatable and should be allocated to your loan. Thus all loans in the pool should be credited pro rata with the amounts received from third party payments. Homeowner obligations declared in default would then be either premature or incorrectly stated in the amount due. Other loans that were not delinquent should have had the principal reduced — none of which was accounted for because the intermediary pretender lenders kept the money for themselves.

Editor’s Note: Ambac’s Profit Surge is the result of illusory losses that are now being recaptured. The “game” was to declare huge losses, take in taxpayer dollars and then gradually filter the money back into the company thus creating guaranteed earnings rising steadily and thus providing an increase in the price-earnings ratio. The investment houses are doing the same thing. They made trillions of dollars is cash profits, declared trillions in paper losses and scared the public and government into giving them money to prevent the collapse of the financial system.

Since trust and confidence in the system is the foundation, it didn’t matter whether they were telling the truth as long as most people believed the lie. The taxpayer bailout was necessary as a symbolic gesture to assure the world that there was always backing by the U.S. Federal government.

The question for these institutions is whether the defaults in home loans were declared prematurely (or falsely) or even caused by policies designed to give credence to the big lie and to provide them with yet another source of windfall profits by picking up homes that are sold in foreclosure at a fraction of the original loan amount. As stated in numerous articles before on this blog, the ONLY people who actually lost money are the investors who advanced the real money into a pool that was used to fund mortgage closings (and also used to fund absurd profits on fees, yield spread premiums etc.) and the homeowners who advanced their homes as collateral on loan products that were sold to them under false pretenses. Both the mortgage backed securities and the loans were sham financial transactions.

And THAT is why you are entitled to compel discovery, compel answers to your QWR, DVL and other requests. If the losses were not real, if the pools were marked down solely on the say-so of the financial institutions that created them, if the default rate was really much lower than the declared defaults, if AMBAC, AIG and others made payments on those pools, and if the investors, as the creditors in the loan transactions received payments directly or indirectly (through their agents) then some part of those payments were allocatable and should be allocated to your loan. Thus all loans in the pool should be credited pro rata with the amounts received from third party payments. Homeowner obligations declared in default would then be either premature or incorrectly stated in the amount due. Other loans that were not delinquent should have had the principal reduced — none of which was accounted for because the intermediary pretender lenders kept the money for themselves.

By Alistair Barr & John Spence, MarketWatch

SAN FRANCISCO (MarketWatch) — Ambac Financial Group Inc. shares surged 71% on heavy volume Friday, after the bond insurer said it swung to a fourth-quarter net profit.

Ambac (ABK 1.10, +0.46, +71.47%) said late Thursday that quarterly net income was $558.1 million, or $1.93 a share. That compares with a net loss of $2.34 billion or $8.14 a share in the same period a year earlier.

The improvement was mainly driven by a $472 million tax benefit, the company said, as well as by lower expenses from losses in its main financial-guarantee business.

Total net loss and loss expenses were $385.4 million in the fourth quarter of 2009, down from $916.4 million in the final quarter of 2008, Ambac reported.

Ambac, one of the world’s largest bond insurers, has been hit hard by losses from mortgage-related guarantees it sold during the housing-market boom of the last decade. When the real-estate market collapsed, Ambac was left paying big claims on those guarantees.

Last month, the regulator of Ambac’s main bond-insurance subsidiary, Wisconsin’s Office of the Commissioner of Insurance, seized a big chunk of its business to protect hundreds of billions of dollars in guarantees on municipal bonds. See Read about Ambac “amputation.”

Ambac also has been settling some of its obligations at large discounts, partly because counterparties worry that the bond insurer is too financially precarious to pay anywhere near 100 cents on the dollar on its guarantees.

“The transfer of structured finance obligations to the state regulator and the subsequent payment at a discounted rate is a de-facto default,” said Egan-Jones Ratings, a rating agency that’s paid by investors rather than issuers, on Friday. “However, credit quality of the remaining corpus is enhanced.”

Egan-Jones affirmed its rating on Ambac at BB+, but noted this rating only applies to the business units that aren’t seized by the Wisconsin regulator.

Shares of Ambac dropped after the seizure was announced, and recently traded near 50 cents. The company’s stock traded close to $100 before the financial crisis.

On Friday, the stock surged 71% to close at $1.10 as almost 200 million shares changed hands. The average weekly trading volume is 72 million shares, according to FactSet data.

Still, Jim Ryan, an equity analyst at Morningstar, said Ambac’s quarterly results weren’t as strong as suggested by the company’s reported net income of $1.93 a share.

“For all the favorable accounting benefits, the fact remains that Ambac has not written any new business in more than a year and continues to exist in runoff mode,” Ryan wrote in a note to investors on Friday.

When analyzing insurers in “runoff,” investors should try to work out whether there are enough reserves to settle claims on existing policies, Ryan explained.

Ambac’s qualified statutory capital fell almost 70% in 2009 while total claims paying resources dropped 20% for the year, he noted.

“With little improvement in the housing market (Ambac’s primary source of claims) and the potential for a double dip in housing prices on the horizon, which could contribute to the growing inventory of potential foreclosures, we think the future remains opaque, to say the least,” Ryan wrote.

Alistair Barr is a reporter for MarketWatch in San Francisco. John Spence is a reporter for MarketWatch in Boston.

Tags: accounting, Alistair Barr, AMbac, default, HERS, illusory losses, John Spence, MarketWatch, mortgage backed securities, pretender lenders, price-earnings ratio, principal reduction, sham financial transactions, third party payments
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