As Ambac Files For Chapter 11, Fed Is On The Hook With $10MM In Short CDS Exposure

Ambac Financial Group has just filed for Chapter 11, using a filing which is so fresh it even forgot to lock the input forms (see attached). The case is 10-15973 in Southern District of New York. The actual filing is not surprising, as we noted earlier that Ambac was likely going to file imminently. What is also not surprising is that the form 1, erroneously, lists assets of between 0 and $50,000 and liabilities of over $1 billion, even as Exhibit A clarifies assets as $394.5 million and liabilities of $1.6824 billion. Obviously someone was in a rush. Keep in mind this is a stock that Cramer was previously pitching to his very few viewers. Ambac's bankruptcy lawyers are Dewey and LeBoeuf, and Blackstone gets the coveted role of financial advisor. None of the relevant unsecured creditors have been disclosed as most are in DTC form, with BNY listed as custodian. Yet one definitive loser in the Ambac bankruptcy is none other than 'our' own New York Fed. As the Maiden Lane I holdings list as of June 30, when the Fed consumed Bear Stearns most toxic 'assets' and gave Jamie Dimon a clean sheet to buy the clean stripped bank for $10/share, it also adopted a bunch of Ambac CDS. And as of June 30, the Fed held $10 million in ABC CDS.

Now that there is a credit event, it will be impossible for the Fed to continue claiming that its rescue portfolios are doing just swimmingly (or so we hope, for BlackRock's sake). Furthermore, the Fed will be forced to payout on the CDS which will likely end up pricing in the settlement auction somewhere very close to zero, implying a near total wipe out on the entire $10 million in short CDS. And lucky Fed: as of March 31, the Fed had actually held a net $50 million in ABC short protection, so in Q2 it covered $40MM worth of short protection. So now all eyes turn to Ambac soulmate MBIA... where the Fed is short $84 million worth of CDS.

Full bankruptcy filing (pdf):

 


Ambac Chapter 11 Filing -

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