Credit Market Woes Du Jour: Ambac Losses, 95% Fall in Earnings at BofA

If you had any doubts that credit market problems were a big part of the equity market panic of this week, a further reminder came this morning.

As reported by Reuters, earnings at the Charlotte bank fell 95% due to over $7 billion in writedowns and reserves for losses. Earnings were 5 cents a share, when analysts had forecast 19 cents. The stock was down $1.97 in pre-opening trading to $34. The breakdown of the losses is not pretty:

Results reflected $5.44 billion of trading losses, compared with a year-earlier profit of $460 million. This reflected a $5.28 billion write-down related to collateralized debt obligations, which the bank said reduced trading profit by $4.5 billion and other income by about $750 million.

Bank of America also set aside $1.74 billion for credit losses, including a $1.33 billion addition to reserves. It also incurred $800 million of losses and write-downs to help some money market mutual funds exposed to risky debt maintain the $1 per share net asset value that all such funds try to keep

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Bloomberg provides the latest detail on the Ambac front. The bond insurer reported an over $3 billion quarterly loss and claims to be talking to “a number” of potential saviors, um, partners:

Ambac Financial Group Inc., the first bond insurer to be stripped of its AAA credit rating, reported its biggest-ever loss and said it is talking to “a number of potential parties” to help overcome a slump in the value of subprime-mortgage securities it guarantees.

The second-largest bond insurer posted a $3.26 billion loss after writing down the value of guarantees on subprime debt by $5.21 billion, according to a statement by the New York-based company today.

Ambac said stockholders and ratings companies are “underestimating” the company’s ability to weather the rout in credit markets. Ambac, an underwriter of $556 billion of municipal and structured finance debt, last week scrapped a $1 billion equity sale after a 71 percent drop in the stock and the departure of its chief executive officer, prompting Fitch Ratings to reduce its insurance rating to AA from AAA.

“We’re in the ultimate crisis of confidence at this point,” John Giordano, a credit analyst at BlueMountain Capital Management in New York, said before the announcement. BlueMountain manages $4.8 billion.

The fourth-quarter net loss, which equated to $31.85 a share, took the 2007 deficit to $3.23 billion, the company’s first ever annual loss. Ambac on Jan. 16 forecast a fourth- quarter net loss of about $32.83 a share.

The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records…..

Ambac’s loss reported today followed the company’s first- ever loss in the third quarter. Before 2007, Ambac had reported profit increases every year for the past decade.

“In retrospect, insurers wish they’d never heard the term structured finance, much less written the business,” said Donald Light, an insurance analyst at Celent, a consulting firm in Boston.

Ambac was unchanged at $6.20 in early New York Stock Exchange composite trading after the U.S. Federal Reserve lowered interest rates in an emergency move. The stock has tumbled 93 percent in the past year, shaving $8.8 billion from the company’s market capitalization.

The company’s 6.15 percent bonds due in 2037 plunged as much as 25 cents last week to 35.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield soared to 17.6 percent and the extra yield investors demanded over government securities widened to 13.4 percentage points.

Prices for credit-default swaps that pay investors if Ambac can’t meet its debt obligations imply a 72 percent chance it will default in the next five years, according to a JPMorgan Chase & Co.

Contracts on Ambac traded at 26.5 percent upfront and 5 percent a year last week, prices from CMA Datavision show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The market slump and scrutiny by credit-rating companies are “underestimating Ambac’s strengths and future potential,” Callen said in the statement. “At the same time, we would expect that over the longer-term, as the market normalizes and perceptions correspond more closely to reality, the market will more accurately assess our assets and strengths.”

Moody’s Investors Service and Standard & Poor’s, the two largest ratings companies, are reviewing Ambac’s ratings for a possible reduction.’