The credit default swap (CDS) market shows increasing...

The credit default swap (CDS) market shows increasing odds that Ambac (ABK)and MBIA (MBI) are headed for bankruptcy. I raised the bankruptcy question earlier today in Death Blow For Ambac? JP Morgan Model Posts The OddsBloomberg is reporting MBIA, Ambac Tumble, Default Risk Soars After Losses. BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Credit-default swaps tied to MBIA's bonds soared 10 percentage points to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years. The price implies that traders are pricing in a 71 percent chance that MBIA will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contracts on Ambac, the second-biggest insurer, rose 12 percentage points to 27 percent upfront and 5 percent a year, prices from CMA Datavision in London show. Ambac shareholder Evercore Asset Management LLC called on the bond insurer to accept a downgrade rather than follow through on its plan to raise capital. 'The company gambled its AAA rating and has now lost that bet,' Evercore said in a letter to directors distributed in a PRNewswire statement today. 'Attempting to buy back the AAA rating by giving away most of the company makes no sense.' Losing the AAA stamp would cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of debt the industry guarantees, causing as much as $200 billion in losses, according to data compiled by Bloomberg. Read that last sentence carefully. That is why Moody's, Fitch, and the S&P did not want to downgrade Ambac and MBIA. In the end, they will be forced to. But if Ambac and MBIA gambled and lost so did Evercore Asset Management in betting on Ambac. Evercore Asset Management, LLC (EAM) is a registered investment adviser with over $500 million in assets under management. We are long-term oriented, contrarian investors, with a typical holding period measured in years. We advise on more than 700,000 shares of Ambac on behalf of our clients. We wrote to you last month to express our opinion, as a co-owner of the company, on the undesirability of raising costly capital to preserve Ambac's triple-A rating. We were extremely disappointed to hear yesterday's announcement that Ambac plans to raise additional equity capital. When we first wrote to you about this on December 21st, the company's stock was at $27 per share and we urged you not to contemplate the issuance of additional equity in order to preserve Ambac's triple-A rating. The notion of issuing equity with the stock now at a small fraction of that late December price is simply absurd. It is impossible for the value of future business to even come close to offsetting the dilution that will occur. Municipalities are wrapping their bonds at the lowest rates in years, and Berkshire Hathaway is entering the business. Even if these things were not happening, it would still be impossible for new business to be sufficiently profitable to justify raising new capital. It's time for Evercore and investors in general to face reality. Those shares are never coming back regardless of what Ambac does or does not do. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.