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To: Robert Douglas who wrote (1080)	2/25/1999 12:33:00 PM
From: Tomato	Respond to of 4691

On a similar note, maybe James can talk about the effect of higher rates on Freddie Mac's 1. earnings and 2. stock price?

To: Robert Douglas who wrote (1080)	2/25/1999 3:25:00 PM
From: James Clarke	Read Replies (3) \| Respond to of 4691

re: Ambac Good question. A rise in interest rates would 1) In all likeihood, hurt the stock (duh) 2) Reduce book value to the extent their bond portfolio has to be marked to market quarterly. 3) The current book of business would be uneffected on the income statement. i.e. whatever that current book of muni business earns, it still earns. 4) Muni underwriting is not terribly interest rate sensitive anwhere beyond the short term. If Dallas is going to build a prison, a 50 bp move in interest rates is not going to change their mind. 5) THIS IS THE KEY. Rising interest rates arguably HELP Ambac's core business because they increase the spread between a AAA and an inferior credit. Remember, all that Ambac does is credit enhancement. So the bigger the spread, the more valuable Ambac's guarantee becomes and the more than they can charge for it. So, cutting to the chase, higher interest rates will probably drop the stock price without negatively affecting the business. Remind me of that when we're seeing 6 1/2% interest rates in June and Ambac is sitting at 44. As for Freddie Mac, I wouldn't know Freddie Mac if it came up and bit me on the leg. So I plead complete ignorance there. JJC