Ambac shares rallied some 32% to $0.78 today on more than 50 million shares after reports that Ambac was withdrawing more than $6 billion in claims that the company had filed against Lehman Brothers (LEHMQ).  There are still no assurances that it survives per our prior comments, but the news flow is currently acting more in favor of Ambac rather than against it.

Last week the company filed suit against Bank of America Corporation (NYSE: BAC) and its Countrywide unit over mortgage-backed security losses.  The mortgages were over $16.7 billion in mortgage-backed securities with allegations that Countrywide fraudulently induced Ambac to insure the mortgages.  Ambac’s ground for claims: 97% of about 6,500 loans reviewed that were spread over 12 different securitizations did not conform to the lender’s underwriting standards as many of those loans were made to borrowers who had limited or no ability to pay their mortgages.  All those liar loans and NINJA loans.  That suit against BofA did not bring about any solid gains, and shares were around $0.56 on September 29.

An issue still against Ambac from last month is that Freddie Mac reportedly joined a group of hedge funds in litigation as creditors against Ambac with claims that it owns about $4.5 billion of mortgage-backed securities that are insured by Ambac.

Frankly, getting sued by Freddie Mac (or Fannie Mae) is something that seems a sham on the surface.  Everyone from the borrowers to the lenders to the regulators and politicians all had their hand in the housing bubble.  Bond insurers and bond ratings agencies ended up offering little of value, but hearing that either Fannie Mae or Freddie Mac are getting involved now is almost ludicrous.  If anyone on the institutional side of the equation has the most blame of all, it would be a close race over whether it was Fannie or Freddie as the first and second catalyst as the endless enablers and promoters.

Today’s news alone did not save Ambac and there have to be many more stars that align for Ambac to be able to even attempt a real recovery or turnaround, but this is proof in the world of trading that even a hint of good news can cause one massive rally in a company this troubled.

JON C. OGG

Aixtron Aktiengesellschaft (NASDAQ: AIXG) closed at $24.80 yesterday and shares are trading up about 7.3% pre-market at $26.62 on over 135,000 shares.

BP plc (NYSE: BP) is trading up this morning after Oppenheimer raised the rating to outperform based upon valuations and based upon it selling off too much.  It is also in the process of its top-kill efforts.  The ADR is up over 4% at $44.15 this morning.

FSI International, Inc. (NASDAQ: FSII) closed at $2.75 yesterday and shares are now up about 24% at $3.41 on 59,000 shares after the company raised its Q3 guidance.  The 52-week range is $0.32 to $4.56.

Lehman Brothers Holdings Inc. (LEHMQ) is dead for all practical purposes, but late yesterday came word that it is suing JPMorgan for billions in damages for what was effectively illegal access of capital due to its clearing arrangement in the final day and hours of operation that helped push it into bankruptcy.

NetApp, Inc. (NASDAQ: NTAP) is trading up after it beat earnings expectations despite the initial reaction being mixed.  Shares are up almost 8% and flirting with a $35.00 handle in pre-market trading.  The 52-week range is $17.86 to $36.49.

Rambus Inc. (NASDAQ: RMBS) is down, but not on a court loss.  It did get a delay though, as the US ITC put off the decision on Rambus’ patents for two more months.  Shares are down over 7% at $23.00 on what is still rather thin trading volume.  Average volume is 1.88 million shares and the 52-week range is $12.27 to $26.00.

VeriFone Systems, Inc (NYSE: PAY) beat earnings and raised guidance and is now affirmed that the turnaround has moved back into growth mode.  Shares are up 5.5% at $18.26 but on rather thin volume so far in the pre-market.

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JON C. OGG

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Effectively, this will allow the remaining remnants of the failed Lehman Bros. to live on outside of the Lehman bankruptcy.  Lehman plans to form a company to oversee a portfolio of derivatives and investments in real estate, corporate debt, and other assets.

An SEC filing this morning showed that the debtors filed with the court a Chapter 11 plan of reorganization which did not file a disclosure statement for the plan. The Debtors have requested that their time to file a disclosure statement for the plan to be extended through April 14, 2010.

Passing on a father’s debt to children or a father’s punishment down to the children has been outlawed for centuries in most areas of the world.  It is a term called “sins of thy father.”  However, it seems that no matter what happens to the remaining part of Lehman or the old part of Lehman, sins of thy father may be a worry here.

JON C. OGG

We do not really subscribe to the notion that executive compensation is the major issue in troubled institutions nor do we subscribe to the notion that executives should generally be slammed over their compensation packages.  Even if our markets are arguably no longer purely free markets, we are not yet in the world of pay caps. 

Congressman Henry Waxman questioned Fuld about his total compensation of some $400 million. He noted executives taking personalhelicopters to work, a $14 million home in Florida, million dollar paintings in his collection and much more.  Fuld has blamed naked short selling and rumor mongering overleverage and regulation over the failure of Lehman.  Fuldtoday discussed selling stock and stock options and said he did not knowthe exact number of he shares currently owned.  He did note the number ofaround 8 million shares today rather than 10 million which had been discussed.  Fuld also hintedthat he had far less influence over the compensation committee atLehman than he did the 1990′s.  But even as the questionscame, Fuld seemed rather unprepared.

What is interesting here is that this new environment of Uncle Sambailing out entities is going to set the precedent for manyhearings in front of oversight committees.  Executive compensation isgoing to be a part of the new bailout package.  It seems that more andmore CEO’s of failing financial institutions are going to get to answer one key question upfront each and every time they are in front of oversight: "Sir, howmuch have you made at this company?"

This won’t come in the form of "How much are you making right now?"…CEO’s and other executives are going to have to answer for the past aswell even for when things were running great.  Frankly, the magnitudeof such issues is very scary if you believe in free markets or if youbelieve in quasi-free markets.

How far this is allowed to go is stillunknown.  We have yet to have any real government buying of securitieswith this new $700 billion off the printing presses.  So we in turnhave no real idea of what to expect on this front.  The main issueahead to be about golden parachutes for executives wheninstitutions fail or become troubled.  But if you listened toCongressman Waxman today, you might begin to wonder if things will beallowed to get much broader in scope or if this is just a sideshow before dealing with issues which directly lead to failure.

Fuld really didn’t seem prepared for some aspects of today’squestioning.  For executives of financial firms in trouble, there aresome obvious lessons to be learned from today’s testimony.   

Jon C. Ogg
October 6, 2008