http://www.nytimes.com/2008/02/13/business/

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At Trial, Lawyer Says Buffett Gave Approval

By BLOOMBERG NEWS

Published: February 13, 2008

HARTFORD — The lawyer defending the former chief executive of General Reinsurance against fraud charges pointed the finger Tuesday at the investor Warren E. Buffett.

The lawyer, Michael Horowitz, said in closing arguments Tuesday that his client, Ronald E. Ferguson, had relied on Mr. Buffett before entering a transaction with American International Group that prosecutors say was a sham.

Mr. Ferguson is on trial with the former chief financial officer, Elizabeth Monrad; a former senior vice president, Christopher P. Garand; the former assistant general counsel, Robert Graham; and Christian Milton, A.I.G.’s former head of reinsurance.

The five are accused of structuring a sham reinsurance transaction at General Re in 2000 to aid phony accounting at A.I.G. Prosecutors claim the deal fraudulently helped A.I.G. add $500 million in loss reserves, a crucial indicator of an insurer’s health.

But in his closing arguments in Federal District Court in Hartford, Mr. Horowitz said that Mr. Buffett, Mr. Ferguson’s boss at the time, knew details of the transaction and approved a $5 million fee that A.I.G. paid to General Re.

Mr. Buffett is chairman of Berkshire Hathaway, which owns General Re. He has not been charged with wrongdoing.

“Warren Buffett, Ron’s boss, and one of the most respected business people in the world, was involved,” Mr. Horowitz said. “It’s crystal clear that it was Mr. Buffett who approved the $5 million fee that Gen Re charged A.I.G.” and that prosecutors say was “secret and illicit.”

Mr. Horowitz argued the deal was not secret, and that 42 people knew of it. In the deal, General Re agreed to transfer $600 million in policies and pay $500 million in premiums to A.I.G.

Then A.I.G. booked the $500 million as insurance, implying a risk of loss, when it should have accounted for it as a no-risk deposit, prosecutors said. Secret side agreements meant no risk was transferred, prosecutors and government witnesses said.

Raymond Patricco, assistant United States attorney, said “there is no evidence that Warren Buffett knew anything significant about aspects of the deal.”

Mr. Buffett did not know that A.I.G. had rebated $10 million in premiums advanced by General Re, which helped make the deal a sham, Mr. Patricco said.

Prosecutors say A.I.G.’s former chief executive, Maurice R. Greenberg, began the deal with a call to Mr. Ferguson on Oct. 31, 2000, after analysts criticized the company about a drop in reserves. Mr. Greenberg has not been charged with a crime.

Ambac Financial Group, Inc. Announces Second Quarter Net Income of $173.0 Million, Down 27%
Second Quarter Credit Enhancement Production(1) $367.8 million, down 31% Business Editors/Financial Editors NEW YORK–(BUSINESS WIRE)–July 25, 2007–Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced second quarter 2007 net income of $173.0 million, or $1.67 per diluted share. This represents a 27% decrease from second quarter 2006 net income of $238.6 million, and a 25% decrease in net income per diluted share from $2.22. The decrease is primarily due to unrealized mark-to-market losses amounting to ($56.9) million, or ($0.36) per diluted share, related to credit derivative exposures in the second quarter 2007. The comparable quarter of 2006 included net realized gains on investment securities of $44.4 million, or $0.27 per diluted share, primarily resulting from cash recoveries received related to a security in the investment agreement portfolio that had been written down in prior years. The second quarter 2007 unrealized mark-to-market losses on credit derivative exposures is the result of unfavorable market pricing of collateralized debt obligations with significant amounts of sub-prime residential mortgage collateral. As further described below, net mark-to-market gains and losses on credit derivatives and net gains and losses from sales of investment securities are excluded from the earnings measures used by research analysts.

Net Income Per Diluted Share

Net income and net income per diluted share are computed in conformity with U.S. generally accepted accounting principles (GAAP). However, many research analysts and investors do not limit their analysis of our earnings to a strictly GAAP basis. In order to assist investors in their understanding of quarterly results, Ambac provides other information.

Earnings measures reported by research analysts exclude the net income impact of net gains and losses from sales of investment securities and mark-to-market gains and losses on credit, total return and non-trading derivative contracts (collectively “net security gains and losses”) and certain other items. Certain research analysts and investors further exclude the net income impact of accelerated premiums earned on guaranteed obligations that have been refunded and other accelerated earnings (”accelerated earnings”). During the second quarter 2007, net security gains and losses had the effect of decreasing net income by ($34.6) million, or ($0.34) on a per diluted share basis. Accelerated earnings had the effect of increasing net income by $25.6 million, or $0.25 per diluted share during the quarter. Table I, below, provides second quarter and six-month comparisons of earnings for 2007 and 2006.

Table I Earnings Per Diluted Share Second Quarter Six Months % % 2007 2006 Change 2007 2006 Change ——- ——- ——- ——- ——- ——- Net income per diluted share $1.67 $2.22 - 25% $3.70 $4.28 - 14% Effect of net security gains $0.34 ($0.31) n.a. $0.30 ($0.38) n.a. ——- ——- ——- ——- Operating earnings (a)(b) $2.01 $1.91 + 5% $4.00 $3.90 + 3% Effect of Accelerated earnings ($0.25) ($0.21) n.a. ($0.48) ($0.32) n.a. ——- ——- ——- ——- Core earnings(b) $1.76 $1.70 + 4% $3.52 $3.58 - 2% ======= ======= ======= =======

(a) Consensus earnings that are reported by earnings estimate services, such as First Call, are on this basis.

(b) Operating and core earnings are non-GAAP measures. See footnote 2, below.

Commenting on the overall results, Ambac Chairman and Chief Executive Officer, Robert J. Genader, noted, “We are pleased with the breadth and quality of our business production in the quarter. Our rigorous and proven approach enabled us to deliver positive results despite the turmoil in the sub-prime mortgage market that resulted in a negative mark-to-market adjustment. Our triple-A business model offers us key advantages, including our ability to hold insured transactions to maturity; no collateral or margin requirements on transactions insured; and, in the unlikely event of default we pay scheduled principal and interest, thereby minimizing liquidity risk.” Mr. Genader added, “Looking ahead, the disciplined execution of our strategy positions us well to benefit from the improving business conditions we see, with wider spreads, enhanced credit terms and increased demand for our valuable financial guarantee products.”

Revenues

Highlights

Credit enhancement production(1) in the second quarter of 2007 was $367.8 million, down 31% from Ambac’s record quarterly production of $531.0 million reported in the second quarter of 2006.

Credit enhancement production for the six months of 2007 of $677.9 million was 11% lower than credit enhancement production of $764.4 million in the same period of 2006.

Table II, below, provides the second quarter and six-month comparisons of credit enhancement production by market segment for 2007 and 2006.

Table II Credit Enhancement Production (1) $-millions Second Quarter Six Months % % 2007 2006 Change 2007 2006 Change —— —— —— —— —— —— Public Finance $114.5 $132.1 - 13% $229.1 $231.2 - 1% Structured Finance 159.1 212.8 - 25% 294.4 303.5 - 3% International 94.2 186.1 - 49% 154.4 229.7 - 33% —— —— —— —— Total $367.8 $531.0 - 31% $677.9 $764.4 - 11% ====== ====== ====== ======

In public finance, Ambac’s premium production decreased even though overall market issuance was up approximately 13%, quarter on quarter. The increase in issuance for the quarter was driven by strong refunding issuance. Ambac’s market share of the insured market was approximately 21%, down slightly from 22% in the comparable prior year quarter. Ambac wrote fewer large, structured transactions in the second quarter of 2007 relative to the comparable prior quarter resulting in the decline in credit enhancement production.

U.S. structured finance second quarter credit enhancement production declined from the prior year as the second quarter 2006 production included two large transactions representing 46% of that quarter’s total production. Capital market activity in the U.S. continues to be robust and during the current quarter Ambac benefited from strong writings in pooled debt obligations (CDOs) where both pricing and transaction structure have improved significantly since the beginning of the year. Competition from the senior/subordinated market has dissipated significantly in mortgage-related asset classes.

International credit enhancement production also declined relative to an exceptionally strong comparable prior year quarter. Second quarter 2006 international production included two large U.K. transactions that represented almost 48% of the total international production for that quarter. The current quarter saw strong flow in asset backed securitizations. During the quarter Ambac closed deals in seven different countries. Management continues to believe that the broad international markets provide an array of opportunities and will be a driver of short-term and long-term growth for Ambac.

Net premiums written (which represent premiums collected during the period, net of reinsurance) in the second quarter of 2007 of $232.7 million were 9% lower than net premiums written of $255.7 million in the comparable period of 2006. The decrease is primarily a result of lower premiums collected up front in public finance and international finance partially offset by lower premiums ceded to reinsurers during the second quarter 2007. Ceded premiums as a percentage of gross premiums written were 10.9% and 18.4% for the second quarter of 2007 and 2006, respectively. Second quarter 2006 ceded premiums were impacted by the number of large deals utilizing reinsurance capacity.

Net premiums written for the six months of 2007 of $453.1 million were 6% lower than net premiums written of $483.6 million in the same period of 2006. Excluding the impact of $37.0 million of return premiums from reinsurance cancellations in the first quarter of 2006, net premiums written are up 1%.

A breakdown of gross premiums written by market segment and ceded premiums for the second quarter and six-month periods of 2007 and 2006 are included below in Table III.

Table III Premiums Written $-millions Second Quarter Six Months % % 2007 2006 Change 2007 2006 Change ——- ——- ——- ——- ——- ——- Public Finance $111.7 $122.9 - 9% $226.1 $215.2 + 5% Structured Finance 87.5 90.2 - 3% 170.8 169.0 + 1% International 61.9 100.4 - 38% 114.1 148.4 - 23% ——- ——- ——- ——- Total Gross Premiums Written 261.1 313.5 - 17% 511.0 532.6 - 4% Ceded Premiums Written (28.4) (57.8) - 51% (57.9) (49.0) + 18% ——- ——- ——- ——- Net Premiums Written $232.7 $255.7 - 9% $453.1 $483.6 - 6% ======= ======= ======= =======

Net premiums earned and other credit enhancement fees for the second quarter of 2007 were $238.3 million, which represented a 6% increase from the $225.0 million earned in the second quarter of 2006. The increase was driven by higher accelerated premiums from refundings and policy termination fees, as well as higher normal premiums and other credit enhancement fees.

Net premiums earned include accelerated premiums, which result from refundings, calls and other accelerations recognized during the quarter. Accelerated premiums were $43.0 million in the second quarter of 2007, up 15% from $37.4 million in accelerated premiums in the second quarter of 2006. During the second quarter 2007 and 2006, approximately $31.6 million and $23.9 million, respectively, of the accelerated premiums related to U.S. public finance transactions and the remainder related to U.S. structured finance and international transactions.