CNBC is reporting Ambac Deal Hits Snag Regarding Raters’ Capital Demands.

CNBC’s Charlie Gasparino did not take to the air at the appointed 3:30 p.m. EDT to declare an impending deal to bail out Ambac. Breaking news? Broken record news might be more like it.

Intoned Charlie at 7:42 a.m. this very morning:

“The bailout of troubled bond insurer Ambac has hit a significant snag, after rating agencies demanded more capital from the consortium of banks involved in the bailout effort, CNBC has learned.

People close to the deal are confident that it will still happen, because the banks and the rating agencies are aware that, if it collapses, there will be a huge decline in the stock market.”

So apparently, the rescue deal (whichever one we are talking about now) hit snags. But guess what? It might still happen, so let’s revisit just how often he’s oversold this story.

Dow Jones Had This Take

Ambac Financial Group Inc. (ABK) hit a “significant snag” Wednesday in its restructuring effort, CNBC’s Charlie Gasparino reported Friday.

At issue is a disparity between how much money a bank consortium is willing to invest in the troubled bond insurer and how much capital cushion ratings agencies require to maintain the company’s rating given a structure that would separate the municipal bond insurance from the collateralized debt obligations.

The consortium banks and Ambac are devising a new proposal to present to the ratings agencies, Gasparino said, “citing people close to the deal.”

He added that talks are ongoing and the deal is not dead.

Translation: The Deal Is Dead Or Irrelevant

This is just one of several significant “snag” that await the monolines. Even if Ambac is funded with “sufficient capital” to meet the non-existent requirements of Moody’s, Fitch, and the S&P; (See MBIA Maintains Highest Rating, Pfizer Cut), the one certainty is that still more funding will will be required down the road.

After all, who wants to buy insurance from Ambac or MBIA with the CDO cloud hanging over their heads, when insurance could instead be bought from Warren Buffett instead?

Little New Business

Bloomberg is reporting MBIA Writing `Very Little’ New Business Amid Scrutiny.

MBIA Inc. is writing “very little” new bond insurance business as borrowers balk at buying a guarantee from a money-losing company without stable AAA credit ratings.

MBIA, whose ratings were under scrutiny by Moody’s Investors Service and Standard & Poor’s for more than three months, said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.

“The demand for our product is the lowest it has been, and we are writing very little new business,” the company said in a filing today with the U.S. Securities and Exchange Commission.

Credit-default swaps tied to MBIA’s debt jumped 106 basis points to 705 basis points, according to London-based CMA Datavision, a signal of eroding investor confidence in the company’s creditworthiness. Contracts on its insurance unit, which investors and banks have been using to hedge against the risk the company loses its top ratings, rose 77 basis points to 505, CMA prices show.

It’s Time To End The Pretending

While Moody’s, Fitch, and the S&P; all pretend that the guarantees of the monolines are worth something, the CDS market and the insurance buyers believe otherwise. Has there ever been an AAA rated company in history with swaps trading over 700?

Wishin’ and Hopin’ and Pretendin’ will not turn a cow chip into a gold eagle. And the longer the ratings agencies live in Bizarro World, the more instability there will be in the system. It’s time to end the pretending.

Mike “Mish” Shedlock
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