Munis Ambacked into corner - (www.ft.com) Ambac, the US company that started the municipal bond insurance business in 1971, may soon put another nail in the industry’s coffin. On Wednesday it warned that it might file a prepackaged bankruptcy amid continuing fallout from its expansion into exotic structured finance and an inability to segregate its separate business lines. Bond insurers occupied a key role in America’s $2,800bn municipal debt market, insuring more than half of issues as recently as a few years ago or more than $1,000bn in outstanding principal. Their raison d’être in the face of a minuscule historical default rate was the impossibility of conducting due diligence on thousands of tiny issuers and extreme risk aversion by investors.
U.S. Faces 'Severe' AIG Losses, Says Panel - (online.wsj.com) A watchdog panel reviewing the bailout of American International Group Inc. said U.S. taxpayers "remain at risk for severe losses" and that the government didn't act aggressively enough to protect U.S. taxpayers during the 2008 rescue. In a lengthy report, the bipartisan Congressional Oversight Panel concluded that the U.S. government, which owns nearly 80% of the insurance giant, is likely to "remain a significant shareholder in AIG through 2012" and it is unclear if taxpayers "will ever be repaid in full." The report contrasted with more optimistic comments Wednesday by Federal Reserve Chairman Ben Bernanke before a U.S. House panel. Mr. Bernanke said that every major financial institution receiving government aid at the height of the financial crisis has repaid taxpayers with interest and dividends, and AIG is not expected to be any different. "AIG, I believe, will repay," he said. Since September 2008, the Federal Reserve Bank of New York and the Treasury Department have committed up to $182.3 billion to support AIG and provided roughly $132 billion of those funds so far. AIG is on the hook to repay about $101 billion mainly through asset sales and stock sales, and the rest is to be recouped from mortgage securities the New York Fed took onto its balance sheet.
‘Short-Term Maneuvers’ Save Public Jobs, Risking Bond Defaults - (www.bloomberg.com) Los Angeles City Councilman Jose Huizar had $10 million to spend on a parking garage for his district. Fellow lawmakers voted instead to use the money for expenses such as payroll. “Ten million is 150 city workers, 100 police officers,” Bernard Parks, chairman of the Council’s Budget and Finance Committee and a former Los Angeles police chief, said at an April 29 meeting. “If we can find $10 million and not give 150 pink slips, that is the best use of the money.” States and cities haven’t cut jobs with the same vigor as companies even as they face deficits projected by the Center on Budget and Policy Priorities and the National League of Cities to reach $200 billion in the year beginning July 1. That’s raised investor concerns about more public debt defaults, which totaled $6.3 billion last year and $8.2 billion in 2008, the most in 30 years, says Distressed Debt Securities, a Miami Lakes, Florida, newsletter. “There are a lot of municipalities that really need to make deep cuts and not just continue short-term maneuvers,” said Ashton Goodfield, a fund manager and head of municipal-bond trading at DWS Investments in Boston, which holds $29 billion of public debt. “This is the time to do it.” Cities and states have sacrificed services during the steepest recession since the 1930s as voter and union opposition and federal stimulus money steered them from labor cuts like those at companies. Public employment fell 1.2 percent, or by 231,000 jobs as of May, since peaking in August 2008, U.S. Labor Department figures show. That’s less than at private employers, which trimmed payrolls 6.9 percent, or nearly 8 million jobs, since a high in December 2007.
Ambac May File Pre-Packaged Bankruptcy as Regulators Limit Cash - (www.bloomberg.com) Ambac Financial Group Inc. said it is considering filing a prepackaged bankruptcy because it’s unable to take dividends from its bond insurance unit to cover holding company expenses. “It is highly unlikely AAC will be able to make dividend payments to the company in the foreseeable future,” Ambac said in a regulatory filing dated today, referring to Ambac Assurance Corp., its principal operating unit. Ambac Assurance, the second-largest bond insurer before the onset of the credit crisis, is issuing so-called surplus notes to policyholders rather than covering their full claims. Ambac announced yesterday that it replaced $16.4 billion of collateralized debt obligations backed by subprime mortgages in exchange for $2.6 billion in cash and $2 billion of newly issued surplus notes in AAC. “The company’s liquidity and solvency are largely dependent on dividends and other payments from AAC and on the value of AAC after the surplus notes have been redeemed, repurchased or repaid in full,” the company said in the filing.
BP shares plunge on oil spill fallout fears - (finance.yahoo.com) Shares in BP plunged again in early trading in London -- extending a sell-off in New York -- as U.S. political pressure intensified on the British oil company to halt dividend payments and fork out greater compensation for the Gulf of Mexico oil spill. The stock had dropped as much as 11 percent to a 13-year low at the open as experts warned dividend payouts would likely be postponed. However, it recovered some ground by midmorning, trading 4.5 percent lower at 373.80 pence ($5.46) as analysts suggested the sell-off was overdone. As BP finds itself caught between an angry U.S. administration and unhappy shareholders, Prime Minister David Cameron's office said the British leader would discuss the issue with President Barack Obama on a scheduled telephone call over the weekend. Investors are fretting about the rising costs facing BP after Obama suggested it should pay unemployment benefits to thousands of oil workers laid off during a moratorium on deep-sea drilling triggered by the spill. BP tried to reassure investors before the London Stock Exchange opened, saying it was in a strong financial position and it saw no reason to justify the U.S. sell-off, and many analysts agree that the company can withstand the crisis. But most market experts also acknowledge that the political rhetoric surrounding the accident was outweighing financial fundamentals. "We don't believe BP has a funding issue but given the overwhelmingly hostile nature of the U.S. government the company may decide to suspend payments until the wells are capped and the clean-up sufficiently advanced to convince the US that it can afford all the costs as well as pay dividends," said Evolution Securities analyst Richard Griffith. "Unilateral action against BP over its U.S. operations, be it unreasonable or illegal, hangs over BP."