By Lavonne Kuykendall, Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- When life hands you lemons, make lemonade.
Bond insurers, including Ambac Financial Group Inc. (ABK), have been doing just that by forcing mortgage originators to make good on soured loans in insured securities. Ambac is taking it one step further, setting up a lemonade stand of sorts that will sell its securities advisory expertise to regulators and other investors.
The Ambac unit is RangeMark Financial Services Inc., a consulting group with around two dozen employees that it put together in July after acquiring an asset management and advisory firm.
RangeMark will allow Ambac “to better predict, manage, and mitigate the risks that we face,” said David W. Wallis, Ambac’s president and chief executive, in August.
Bond insurers and ratings agencies got into trouble by underestimating losses on mortgage-backed securities, particularly those backed by second mortgages. The problem of highly rated securities that turned out to be junk triggered a broader re-examination of credit ratings and loss assumptions on structured debt backed by mortgages and other assets.
In an interview Thursday, Robert Smith, RangeMark’s chief executive, called the unit a “new school organization” that will provide advisory services and independent credit rating advice for structured credit products, not only for bond insurers but for other capital markets participants. He said he could not discuss revenue projections, and an Ambac spokesman said it was still in the early stages of development as a revenue producer.
According to a recent Moody’s Investors Service report, bond insurers have estimated that they will receive more than $4 billion in remediation recoveries for breaches of contractual representations in transactions they insure, particularly on securitizations backed by second-mortgages originated in 2004- 2007.
Smith said investors are also looking for advice on other asset categories. One job for RangeMark is to help Ambac examine these and other securities to help determine how they will perform over the long term.
“Having a company with experience looking at third-party portfolios and providing unbiased evaluations may help Ambac,” said Thomas Adams, an attorney at Paykin Krieg & Adams LLP who works as a strategic consultant and expert witness on issues relating to the financial crisis. He previously worked at bond insurers Ambac and Financial Guaranty Insurance Co. or FGIC. “It might give them leverage and legitimacy when negotiating with Ambac’s counterparties. Since the successful negotiation of commutations will be critical to whether, or in what form, Ambac survives, this might give them an edge.”
In November, Ambac negotiated commutations, or cancellation, of four credit default swap contracts that covered its exposure to four collateralized debt obligations of asset-backed securities with multiple counterparties that were valued at $5.03 billion. Ambac settled the contracts for cash payments of approximately $520 million, less than the impairment Ambac had calculated on the exposure.
RangeMark could potentially help Ambac with more deals, Adams said. “A fresh set of experienced eyes might help spot things they might not have recognized.”
Closest rival MBIA Inc. (MBI) has also been working on commutation talks, but could be hampered by its litigation with its investment bank counterparties.
Ambac shares traded down 5.3% recently, to 84 cents.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@ dowjones.com
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