Welcome to the Ambac Financial Group, Inc. third quarter fiscal year 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Sean Leonard, of Ambac Financial Group, Inc.

Welcome to Ambac's third quarter conference call. I'm Sean Leonard, Chief Financial Officer of Ambac. Presenting with me today are David Wallis, Chief Executive Officer and Cathy Matanle, Managing Director Portfolio Risk Management who will discuss our credit portfolio. Our earnings press release quarterly operating supplement and a slide presentation that follows along with this discussion are available on our web site. I recommend that you view the slide presentation as we speak today. This call is being broadcast on the internet at www.ambac.com During the conference call we may make statements that would be regarded as forward-looking statements. These statements may relate to among other things, management's current expectations of future performance, future results, and cash flows and market outlook. You are cautioned not to place undue reliance on these forward-looking statements which reflect our current analysis of existing trends and information as of the date of this presentation, and there is an inherent risk that actual results, performance or achievements could differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. These differences could arise from a number of factors. Information concerning factors that could actually cause results to differ materially from the information we will give you is available in our press release and on our most recent Form 10-K and subsequently filed Form 8-K. You should review these materials for a complete discussion of these factors and other risks. A copy of these documents may be obtained from the SEC website. I will now turn it over to David Wallis who will comment on the current market environments, our discussions with the Treasury and Ambac's strategic priorities.

Since we last reported on August 6, few if any would have predicted the tumultuous events of the last few months. These events have been somewhere between significant and transformational in nature and have touched most areas of the globe. Similarly, financial markets have been exceptional volatile and have generally declined significantly. Many institutional participants in these markets have been transformed, or in a few exceptional cases, no longer exist. In the U.S. specifically and far from alone in this, house prices have declined significantly, consumer confidence has hit record lows and credit markets have suffered more or less complete seizure. Unsurprisingly official and consensus views on the economic outlook have deteriorated. That is the story of the last three months, and this quarter's results are reflective of this distressing context. More strategically, it is reasonable to characterize our position as being balance sheet denuded by our exceptional historic standards, but on a forward-looking basis is possessing valuable skills in connections in an environment crying out for just those assets. The real question, is how to get from where we are presently to an appropriate and remunerative usage of those skills in connections in the future. Let me review the present position. The current spotlight is on our ratings, more specifically Ambac's Moody's rating post our release concerning Ambac of September 18. Crystallization of the referenced downgrade would precipitate the significant liquidity issue within our financial services business. Let me take these rating and liquidity items in turn. First the ratings. Clearly we can neither speak for nor predict what rating agency opinions might or could be. Let me clear that there are many elements of the ratings analysis with which we would wholly agree and there's no doubt this is a difficult task. However, let me also say that…

I will now provide a brief overview of the financial results focusing primarily on factors driving our results and I will also briefly comment on rating agency reviews and liquidity. If you would please turn to Page 8 in the slide presentation for a summary of our financial results. Net loss for the third quarter of 2008 was $2.4 billion or $8.45 per share. That is down from a net loss of $360.6 million or $3.53 per share in the comparable prior year quarter. Driving most of the decline is net non-cash mark to market losses in our CDO of ABS portfolio. Also contributing to the quarterly loss are increased net provision for loss and loss adjustment expenses primarily related to second lien RMBS transactions and realized losses in our financial services investment portfolio. Partially offsetting these losses are increased accelerated earned premiums resulting from re-fundings. To assist you with our financial statements and analysis of our reported earnings, we also report our earnings on an operating and core basis. Page 9 summarizes these earnings measures. Both of these earnings measures are considered non-GAAP. Operating earnings excludes the net income loss 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 that are not impaired. Core earnings further excludes the net income impact of accelerated earned premiums from re-fundings. Operating earnings per share in the third quarter 2008 were $7.81 per share. That's a loss. Remember that in calculating operating earnings, we exclude the impact of unrealized gain losses from our CDO portfolio but do not exclude the impact of estimated credit impairments within that portfolio. In the third quarter, Ambac reported credit impairment of $2.51 billion pre-tax, or $5.67 on a per share…

Let me move on to the portfolio. Although the mortgage crisis and now weak economy have heightened our surveillance of vulnerable credit financial types across our portfolio, mortgage related assets continue to be our major concern. Therefore, my prepared remarks will address this portfolio. I'll start with the high level overview, then move to address the direct MBS book then the CDO of ABS book, in both cases covering reserves, performance and remediation. Please note we've provided in the appendices an update on the CLO portfolio as well as an updated MBS claims projection chart. Turning to Page 19, let me start by summarizing the key sub sectors of both the direct MBS and CDO books of business. Exposures are down slightly due to extremely low voluntary pre-payment rates underlying the mortgages in both of these portfolios. The direct MBS book now stands at $42 billion versus $45 billion at the end of the second quarter. The second lien portfolio which comprises closed-end seconds and HELOC stands at about $15 billion or essentially flat to the second quarter. The CDO of ABS portfolio was $30 billion. We have high grade CDO of ABS exposure of about $25.5 billion. The CDO squared portfolio has been reduced dramatically from $2.5 billion to $1 billion after the commutation of the double A B book transaction back in August. On Page 20 we provide a current snapshot of Ambac's current reserves and impairments. As of the end of the third quarter Ambac has approximately $6 billion in total mortgage related reserves and impairments. 78%, $4.8 billion relates to the CDO of ABS book while the remainder relates to the direct MBS book. Of the direct MBS portfolio on the left, the majority of Ambac's reserves relate to the second lien product shown in the…

That's the end of our prepared remarks. We would now like to open it up for questions.

(Operator Instructions) Your first question comes from [Arun Umar – J. P. Morgan] [Arun Umar – J. P. Morgan]: The comments you made earlier regarding liquidity based on a potential rating action, if Moody's does take you down a couple of notches, how do you expect to remediate the situation and cover the shortfall. Have you had any recent dialogue with the Wisconsin Insurance Commission in terms of allocating assets especially in light of the fact that the statutory capital has dropped quite a bit in the third quarter? If you look beyond this year and getting into next year with the fact that if you don't have any dividend capacity, what kind of liquidity position do you expect to have given that you don't have any bank lines currently?

In talking about discussions with the Wisconsin Insurance Department, we've had quite active discussions as David pointed out in his remarks, and this goes back quite some time so this is not obviously an issue that's crept upon us. It's been out there and it's an issue that Wisconsin Insurance Department is well briefed on. Regarding our plans to solve those liquidity issues, are to utilize the resources of the insurance company to meet collateral posting requirements and termination requirements in both GIC and the interest rate swap business. That will be a combination of purchases of assets out of the business. It will be a bit of secured lending to the business which we've done some of already, and it will be some unsecured lending to the business to accomplish the result of either terminating or collateralizing. Obviously, if we were to be down graded, we'll take an economic view of whether or not to terminate or to collateralize contracts based upon the terms of the liabilities, rates and the like and what type of posting requirements are required under those contracts. For example, long term fixed rate collateralizing with Treasuries would not be in our best interest. Those are the plans to handle that and we've had active discussions and up to date. Relating to the holding company liquidity, we've provided a pretty good overview in the materials, Page 15 of the material which gives you a sense for where we expect to be at the end of the year relating to our cash balances. We will need to discuss with Wisconsin the plans to take dividends next year but in the case that we were not able to take those, we do have approximately 1.9 coverage over that debt service requirements for 2009. [Arun Umar – J. P. Morgan]: In terms of your book equity largely being wiped out and your stat capital down substantially, is there any further deterioration in your portfolio RMBS or other exposures you have. The Wisconsin commissioner arguably could be very concerned that your stat capital may also go the way of your GAAP capital. In that case what is the likelihood that they'll let you do anything in terms of the GIT portfolio rather wouldn't they be focused your core business as opposed to in any way making the GIT holders whole?

Those are issued that obviously are on the table and clearly the regulator in Wisconsin is primarily concerned with policy holders. I'd say as Sean commented, we have a very open and transparent relationship with Wisconsin. This is not news. They have spent a lot of time with us and their advisors also and they are fully cognizant of what our position is. Obviously we can't speak for them. We work with them continually more or less on a daily basis. So I think they're very aware of all the issues that you raised as are we and as Sean replied, this isn't news.

You made some comments about statutory capital. We provided a reconciliation where we stand as of the end of the third quarter, and what's not on this page is a substantial contingency reserve that we have established that we have not taken down. The statutory rules would allow a petition to the Insurance Commissioner in situations where the wash rates are onerous and there's certain requirements that surround that and where policies were to be expired so refundings and the like. So that would be a discussion we would have with them at that appropriate time.

Your next question comes from [Sy Lund – Morgan Stanley] [Sy Lund – Morgan Stanley]: On the ABS CDO exposure, I'm looking at Slide 32, and I'm trying to get some more detail on the notes still outstanding on the CDO of ABS. Can you give us the numbers of what CDO's exposure is right now and what the percent impairment is on that as well.

There's Slide 19 provides detail where there's heavy mortgage related securities and the CDO. That number is approximately to $30 billion so that obviously corresponds to the bar chart. And you see the break out that we have there, $25.5 billion high grade, $0.5 billion in mezzanine, $1.1 billion in CDO squares and then we have a commitment to provide a guarantee of $2.9 billion. When you add that up it gets you your number. If you were to flip the page, on Page 20 shows you the estimated impairment for the CDO of ABS portfolio of $4.8 billion. [Sy Lund – Morgan Stanley]: Can you walk us through any strategic changes or any transition issues that have come up with Michael Cowen stepping down over the past several weeks.

There are no transition issues whatsoever. In terms of the strategic issues, I think our priorities are as we've laid out. Clearly there's a lot of activity right off. That's in a sense sprung up over the last few weeks. It's always a current focus for us. I'd emphasize we don't see that as a silver bullet and as the be all and end all. We think we're eligible. It depends on the terms of eligibility should we in fact be eligible. We think there's a business beyond TARP if TARP doesn't occur in relation to ourselves, and that brings us onto a more internal focus in relation to the portfolio as I described and the [Connie Lee] initiatives I described. It's clear, you look at the municipal markets right now year on year volume is down 57%. You look at the cost of funds to municipalities its way above taxable rates. These are extraordinary times and I think the markets are under distress and we act as I described as a lubricant between investors and issuers. I think there are real opportunities for us. I think we need to take advantage in a helpful way in terms of the systemic position I think we are in to meet the needs of issuers and investors and get the thing going. We think we can, and we're looking forward to it. [Sy Lund – Morgan Stanley]: If I assume a further increase in cumulative losses of CDO of ABS from 23 to 25 is there a linear progression from the 16 to 18 you had up to the 19 to 21? Should we assume a linear progression as potential losses are increased on the CDO portfolio?

You probably shouldn't. It's not really linear. The deterioration should those projections occur is faster than linear. Clearly one's view depends on one's view of the world. As we outlined we do think that the terrific by the public sector will have an impact there. We believe that pretty firmly and we think there is some evidence that there will be an impact. The impact isn't linear. If you turn back the clock though, just to make a point I think we made on a prior call, one of the meaningful things that's occurred in relation to the CDO of ABS has been the very fast unexpected write off of CDO buckets. That obviously is a one hit wonder. We disclosed pretty fully on our web site the extent to which that component of these deals is written off. That leaves the performance of mortgages as the real variable here. We've chosen for the reasons we outlined to up our assumptions. These are very forward-looking estimates. We're not expecting claims in some cases for 10, 20 even 30 years. 5% is roughly where the loss is right now. We're forecasting 19%. The basic math of this stuff is such that the losses or the future impairments are not linear in their nature.

Your next question comes from Darin Arita – Deutsche Bank. Darin Arita – Deutsche Bank: Can you give a little more color on your discussions with Treasury post your posting of comments to them last week?

We believe absolutely that we are systemic. I'm talking about the industry. This is an Ambac begging bowl. This is an industry move. Why are we systemic? Well I think we all know our place in the municipal industry. I think also there are other effects. There are effects upon the holders of insured debt and counter parties. Banks have clearly written down their exposure to us. That's capital depleted. That isn't helpful in the context of the need to get bank credit going. I think there are also other issuers and other sectors aside from municipal sectors that would welcome a return to a healthy industry. I think that some of the health care issuers, student loan issuers, and also one or two other asset backed issuers would welcome our return. So the first point is a systemic point, and I think the facts speak for themselves. The second point is the solvency point. Clearly it's not in the interest of tax payers and we are absolutely at one on this to prop up a failing institution. We think our issues are liquidity along the lines we've discussed, not solvency. Clearly Treasury and others need to be persuaded of that fact because they don't want to throw good money after bad. I hope and believe that argument is a very tenable one and that we'll win it. The next point comes down to the precise nature of any measures that could be undertaken here. We posted some suggestions as did others in relation to the request to comment from the TARP so I think there are many alternatives here and I think all those details have yet to be played out. In summary the main points are systemic. That's what it's about. That's the state of the world right now. Solvent, we think yes clearly in our case, and then getting down to the detail both in relation to the size of any perspective measures and also the precise structure. I think it's those last two elements where more work needs to be done. Darin Arita – Deutsche Bank: Has Treasury responded at all since October 29? Have there been any dialogue?

There has been dialogue as you would expect, but no formal response. Darin Arita – Deutsche Bank: With respect to your current loss reserves, how much worse do you expect things to get with respect to home prices and delinquency trends?

It's a crystal ball and we're making very forward-looking estimates of pretty complicated matters. What we try to do is take a decent run at this in relation to the assumptions and the rational for the assumptions that we've outlined. One way of looking at this, if you imagine the normal kind of normal distribution, I think hence the TARP, hence all the concerns in the markets at present, we're way out there in the tail of that distribution now. I think that the TARP and other private sector measures are and we believe will pull in that tail. I think what we're seeing or what we will see is a compression from where we are now which is a very, very stressed environment, but we expect that some of the more extraordinary stress losses that have promulgated, we think they're prove to be not well founded and that the tail, the extreme end of what might happen will be surmounted by the TARP. What's the joker in the pack? It's the broader economy. I think what you have to do is balance out the incentives for home owners now, the fact that we are in a terrifically stressed environment, the fact that the TARP will have a tremendously beneficial impact. It's beginning to have an impact in the banking markets now and the other side of the argument is what's the economy. There's a huge amount of connectivity between all these issues but in our view, we've taken a very good run at this and it's tough to project the future. We've been consistently wrong, but we're feeling comfortable in the estimates we've made. Darin Arita – Deutsche Bank: What is your estimate for home price declines underlying these?

What we've done is upped our severities quite considerable so we're standing at 55% in relation to sub prime and 45% in relation to Altay and obviously that reflects the dilution in house prices, longer liquidation time frames which incur carrying costs so all that adds up to a cumulative loss estimate of around 19% or '06 sub prime. Another thing is we've move commensurately and 8% to 13% were the numbers in relation to mid prime.

Your next question comes from Gary Ransom – Fox-Pitt Gary Ransom – Fox-Pitt: I noticed you took a write off of some of the deferred tax assets. Could you talk a little bit about what strategies you might have either in the investment portfolio? I believe you still have a lot of tax exempt bonds there where there might be ways to speed the realization of some of those.

When you're looking at the realizability of the deferred tax asset, one needs to consider what type of taxable income one would have in the future to allow you to use those future tax deductions. In our case, the preferred tax asset is being driven largely by the extensive nature of mark to market unrealized losses that we've taken to date. What we're looking at is the scheduling out of our revenues utilizing certain assumptions for expenses and scheduling out those losses and loss payments, losses for insurance policies and losses on credit derivatives that are on our balance sheet. There are tax claiming strategies that could be considered. The most obvious one is what you mentioned. We do have a portfolio of tax exempt securities. We've brought that in a bit. We'll be looking to bring that in further to optimize the portfolio from a standpoint of tax planning and utilization of net operating losses into the future. Since June 30 we brought the tax exempt portfolio down by about $2 million on the investment side. Gary Ransom – Fox-Pitt: On the PLO's corporate spreads have moved a lot. I couldn't tell if there was any mark to market of any significance on the CLO's. Is that in fact the case?

I would characterize that as the case as compared to what's going on in the CDO of ABS portfolio. We do have mark to market in the CLO portfolio that is primarily lower due to the high grade nature of that portfolio and the lack of significant internal down grades that have been apparent in the CDO of ABS portfolio. We do have mark to market portfolio for CLO's and it's a little bit shy of $20 billion. It's a smaller balance. It's a more highly rated balance. We have a slide that goes through that, of the ratings and the quality of those transactions. If you look on Page 50, you'll see our combination of CLO's and other transactions for par on the derivative side not all these are derivatives, but the derivatives side close to $30 billion. Gary Ransom – Fox-Pitt: On the loss mitigation, you filed claims in some cases. I'm just trying to understand what the process has been. You've tried to work with them to come to some settlement and you just can't reach a settlement so then you have to file a claim? Is that basically the process that happened?

You basically kick off looking at loans, re-underwriting loans, individual loans and pointing out where those loans are deficient in relation to the representation warranties that were made pursuant to the description of what loans should have gone into that particular shell and that particular issue. You say, well this loan is deficient, here's why. Please take the loan out and put in a loan that fits the criteria that were agreed upon or inject cash. What happens is, generally speaking that the issuer has 90 days to consider this, in fact should usually replace the loan or inject cash on the earlier of 90 days or being aware of the deficiency in the first place. What you get into very slowly because of the 90 day point is a phase about is that representation warranty breached or not. We have to have a very strong view on some of these reps and warranties. At the end of that 90 day period, assuming that not sufficient loans have been taken out and cash put in, then you're into filing a claim and getting into court. That's what is beginning to happen. We're not surprised by that. We have prior experience of these sorts of issues. In the estimates that we've made we've allowed a period of about three years to come to a satisfactory solution on these things. This is an extended event. It will take a time to come through but we do believe it will come through. Gary Ransom – Fox-Pitt: Are your estimates for the recovery, is that a conservative estimate in the sense that you could conceivably recover much more than that?

We believe it's conservative. We cannot recover more than claims will pay so you can't make a profit on this. The upper bound is set, but as Cathy pointed out, when you've got transactions where we believe serious breaches in reps and warranties, so this is not small stuff, serious rep and warranty breaches of 70% to 80%. If you have a tranches deal, and some of these deals are tranched and we take the top tranche, it implies some terrific coverage to any projected gross claim that we might incur. But we can't take a profit above that which we projected on a gross basis.

Your next question comes from Steve Stelmach – SBR Capital. Steve Stelmach – SBR Capital: Is it your expectation that TARP participation guaranteed program would somehow reverse out previous credit impairments, and if not you mentioned a business model beyond TARP. Could you describe how you would expect to execute that business model given the negative equity position?

I've described TARP, and I don't know all the details particularly until it's worked out, but you could broadly classify that as being direct or indirect. There are programs that are beginning to be put in place that will affect the mortgage markets directly, not strictly TARP but the FDIC for example is making all sorts of noises in relation to trying to keep people in homes. What that would do and other similar measures in the private sectors, J.P. Morgan announced a pretty major series of steps last week, what that would do is tend to reduce the upward march of delinquencies, foreclosures and cumulative losses. So to the extent to which worst forecasts losses did not accrete to those levels that would be a very helpful fact to us. Secondly, in relation more particularly to ourselves, and I should probably say the industry, as with the banks, there are all sorts of possibilities. One thing that is well known is the capital purchase program in relation to injection of preference share. I'm not saying that's what will happen, but there is a precedent for that in the banking sector. There are other ideas under the insurance part of the act and some of those we talked a little bit about in the submission that we made in response to questions. So it makes sense to have some kind of excessive loss policy. It could some other form of reassurance or other structure. All these things are possible. I think there are mortgage direct things and industry direct steps that can and will happen.

I would just mention one last piece of the program within the asset purchase program, there could be some benefits to our residential mortgage backed securities that we own, are all A securities in our GIT portfolio, and we set out some ideas that we had in the submission that David mentioned that we sent out at the end of last month. It may not change the intrinsic view particularly if we were to take the credit risk for those underlying assets but what it would do is increase the values of those assets which would obviously help book value and potentially help some of the impairment values. That would be dependent upon the price and the level of participation there was in the program.

In relation to the second part of your question, you referenced our negative equity position. I think the core is evident from our figures that the asset position is fairly largely a function of mark to market as I tried to describe. I think if you look at the world today, and think about the stills we have in our core markets and municipal related markets, does the man from mars think there are more or less need for those skills today than there was six months ago or a year ago? I think the answer is pretty evident that there's more need for those skills. So the question is, how can we position ourselves? Possibly through some form of restructuring activity like the Connie Lee initiative for example to take advantage of that and serve our fixed income and issue stakeholders. We believe we can do that and we're working extremely hard to do that.

Your last question comes from Douglas Makepeace – Sperry Fund Management. Douglas Makepeace – Sperry Fund Management: The current environment makes the adjusted book value number even less calculatable than it was before but can you give us an update about that?

Adjusted book value numbers at the end of the quarter are slightly more than $7.50. I believe we also have a slide that shows the components that you might want to refer to. That's on Page 55. It shows the progression. At the end of the third quarter, $7.18 is the end of the quarter number and it shows the components for that. One could also depending on your view could to the points that David mentioned, a significant depressing impact on these numbers is the extend of reductions that we've taken from mark to market on our credit derivative portfolio as well as the full mark to market that we've taken in our Alt A GIT portfolio. So depending on one's view, you can adjust the numbers for that as well.

There are no further questions at this time. I would like to turn the floor back over to Mr. Sean Leonard for closing comments.

There's just a couple of additional points that might be helpful. If you take adjusted book value and exclude those unrealized gains and losses that I had just mentioned, the numbers come out slightly less than $20 per share. The other point in on Ambac Assurance corporation, the GAAP financial statements of the Assurance company on a consolidated basis, the equity at that level, on a GAAP basis is positive largely due to the guaranteed investment contract business being outside of that and the equity investments made by the parent company through the debt. We appreciate everyone participating in the call. We are available to answer questions as they arise. Thank you very much.