ABK Ambac Financial Grp. Common Stock

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today released its comments on the development of a Treasury Guarantee Program for Troubled Assets. A summary of Ambac�s proposals follows: BACKGROUND: US financial guarantors collectively guarantee $2.3 trillion in debt of which $1.4 trillion is US state and municipal debt and another $250 billion is linked to US mortgages. Ambac founded the municipal financial guarantee industry in 1971 and has grown to be the second largest financial guarantee insurance company. Ambac also has considerable experience operating a secondary market guarantee program, similar to that which the TARP seeks to implement. Ambac is therefore well qualified to comment on the Treasury�s proposed Guarantee Program. Financial market stability and economic stability are tightly linked. Given uncertainty about the depth of the recession and its effects on the consumer, rating agencies and investors have projected dire economic scenarios onto the existing balance sheet assets of companies exposed to consumer credit. These extreme economic scenarios suggest losses that potentially overwhelm the capital base of these asset holding companies. As a result, these companies have been cut off from the capital markets and in turn have cut off their own new loan originations which would help stabilize financial markets and in turn the economy. In order to help counteract this systemic implosion, the guarantee program should be designed to address issues that cannot be efficiently addressed by the purchase program while minimizing the credit risk to the US taxpayer. Support that helps to stabilize the US financial guarantors will have an exponentially positive impact for several critical sectors of the US economy: states and municipalities seeking to fund essential government services and capital projects; banks that hold billions of dollars in exposure to US financial guarantors; individual investors who hold guaranteed municipal bonds in their investment and retirement portfolios; consumers who benefit from the increased availability of credit for liquidity and funding that results from functioning capital markets; and securities issuers who would face adverse liquidity and/or cross default impacts as a result of financial guarantor downgrades or failures. securities issuers who would face adverse liquidity and/or cross default impacts as a result of financial guarantor downgrades or failures. RECOMMENDATION: The guarantee program should consist of two sub-programs: 1) An excess of loss portfolio guarantee program offered to entities that traditionally buy and hold credit risk. This group would include US financial guarantors, whose credit ratings have been threatened and whose access to the capital markets has been denied due to the potential volatility of the performance of their portfolios. An excess of loss portfolio guarantee would provide a guarantee on a specified amount of portfolio losses in excess of a threshold, or �attachment point� in order to free up capital and permit additional generation of credit. The benefits of the excess of loss portfolio guarantee program include: efficient utilization of the limited capacity under the Act; rapid impact on financial market liquidity and stability; substantial financial and operational efficiencies; and reduced moral hazard and risk of adverse selection, as guaranteed assets continue to be managed by current holders who have significant knowledge of the assets and a significant interest in mitigating losses. Alignment of interests may be achieved by providing for risk sharing with the entity receiving the benefit of the guarantee. Such risk sharing could consist of one or more of three elements: an attachment point structured to exceed expected losses on the portfolio a parallel loss absorption structure, under which the guarantee program would cover a portion, but not all, of the losses experienced beyond the attachment point, for example, the guarantee program could pay 90% of each dollar of losses, with the beneficiary required to absorb 10% of such losses, and a �detachment point� beyond which all risk of loss would revert to the entity benefiting under the guarantee program. This structure would make the program efficient and attractive to users, with the relatively high attachment point providing a lower requirement for individual asset analysis, rendering administration of the program more cost-effective. 2) A guarantee program that will directly guarantee existing securities. The buyer of the guarantee will minimize further potential capital risk due to future rating downgrades of the securities or additional performance deterioration of the underlying collateral. The guarantee program could also assist in creating market liquidity for performing but otherwise illiquid securities as uncertainty in capital markets has rendered many securities backed by consumer debt illiquid, even when the underlying collateral is fully performing. Student Loan securities, the underlying assets of which are often government guaranteed, are a good example of this phenomenon. To be effective, the program should limit its exposure to risk by only guaranteeing senior securities and should further limit participation in this program to entities whose participation will assist in meeting the multiple objectives of the Act, e.g., better access for consumers to mortgage loans and/or freeing liquidity that will be used to generate additional lending or guarantees or other extensions of credit. The program should not guarantee securities if a holder has purchased a security and a credit default swap (CDS) on the same security unless the holder unwinds the hedge and any benefits of the hedge contract are applied to reduce the government�s risk. Finally, the guarantee program offers flexibility that the purchase program does not, including risk-sharing options. For example, a financial guarantor might seek to obtain a guarantee under the program on mortgage related exposure it holds in its portfolio but structured on a second-to-pay basis. In this construct, the financial guarantor would provide a full guarantee to Treasury. Consequently Treasury would be at risk only if both the underlying securities and the financial guarantor default on their obligations. This approach has the benefits of reducing Treasury�s risk, aligning the interests of the two parties, keeping the securities on balance sheet for the financial guarantor and allowing it to continue to manage the exposure. It also avoids moral hazard and adverse selection. Ambac�s submission can be found, in its entirety, on our website at www.ambac.com Forward-Looking Statements This release contains statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any or all of management�s forward-looking statements here or in other publications may turn out to be wrong and are based on Ambac�s management current belief or opinions. Ambac�s actual results may vary materially, and there are no guarantees about the performance of Ambac�s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1)�changes in the economic, credit, foreign currency or interest rate environment in the United States and abroad; (2)�the level of activity within the national and worldwide credit markets; (3)�competitive conditions, pricing levels and reduction in demand for financial guarantee products; (4)�legislative and regulatory developments; (5)�changes in tax laws; (6) changes in our business plan, our decision to discontinue writing new business in the financial services area, to significantly reduce new underwriting of structured finance business and to discontinue all new underwritings of structured finance business for six months from March 6, 2008; (7)�the policies and actions of the United States and other governments; (8)�changes in capital requirements whether resulting from downgrades in our insured portfolio or changes in rating agencies� rating criteria or other reasons; (9)�changes in Ambac�s and/or Ambac Assurance�s credit or financial strength ratings; (10)�changes in accounting principles or practices relating to the financial guarantee industry or that may impact Ambac�s reported financial results; (11)�inadequacy of reserves established for losses and loss expenses; (12)�default by one or more of Ambac Assurance�s�portfolio investments, insured issuers, counterparties or reinsurers; (13)�credit risk throughout our business, including large single exposures to reinsurers; (14)�market spreads and pricing on insured collateralized debt obligations (�CDOs�) and other derivative products insured or issued by Ambac; (15)�credit risk related to residential mortgage securities and CDOs; (16)�the risk that holders of debt securities or counterparties on credit default swaps or other similar agreements seek to declare events of default or seek judicial relief or bring claims alleging violation or breach of covenants by Ambac or one of its subsidiaries; (17)�the risk that our underwriting and risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss as a result of unforeseen risks; (18)�the risk of volatility in income and earnings, including volatility due to the application of fair value accounting, or FAS 133, to the portion of our credit enhancement business which is executed in credit derivative form; (19)�operational risks, including with respect to internal processes, risk models, systems and employees; (20)�the risk of decline in market position; (21)�the risk that market risks impact assets in our investment portfolio; (22)�the risk of credit and liquidity risk due to unscheduled and unanticipated withdrawals on investment agreements; (23)�changes in prepayment speeds on insured asset-backed securities; (24) factors that may influence the amount of installment premiums paid to Ambac; (25)�the risk that we may be required to raise additional capital, which could have a dilutive effect on our outstanding equity capital and/or future earnings; (26)�our ability or inability to raise additional capital, including the risks that regulatory or other approvals for any plan to raise capital are not obtained, or that various conditions to such a plan, either imposed by third parties or imposed by Ambac or its Board of Directors, are not satisfied and thus potentially necessary capital raising transactions do not occur, or the risk that for other reasons the Company cannot accomplish any potentially necessary capital raising transactions; (27)�the risk that Ambac�s holding company structure and certain regulatory and other constraints, including adverse business performance, affect Ambac�s ability to pay dividends and make other payments; (28)�the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on our business, operations, financial position, profitability or cash flows; (29)�changes in expectations regarding future realization of gross deferred tax assets; (30) risks relating to the re-launch of Connie Lee; (31) other factors described in the Risk Factors section in Part I, 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, and also disclosed from time to time by Ambac in its subsequent reports on Form 10-Q and Form 8-K, which are or will be available on the Ambac website at www.ambac.com and at the SEC�s website, www.sec.gov; and (32)�other risks and uncertainties that have not been identified at this time. Readers are cautioned that forward-looking statements speak only as of the date they are made and that Ambac does not undertake to update forward-looking statements to reflect circumstances or events that arise after the date the statements are made. You are therefore advised to consult any further disclosures we make on related subjects in Ambac�s reports to the SEC. ******************* Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has earned a Aa3 rating from Moody's Investors Service, Inc. and a AA rating from Standard & Poor's Ratings Services; Moody�s ratings are on review for downgrade, while Standard & Poor's maintains a negative outlook. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK).