Quote of the Day: Ackman on MBIA

Bill Ackman asks if Fitch Ratings should really have a Triple AAA rating on MBIA:


Does a company deserve your highest Triple A rating whose stock price
has declined 90%, has cut its dividend, is scrambling to raise capital,
completed a partial financing at 14% interest (now trading at a 20%
yield one week later), has incurred losses massively in excess of its
promised zero-loss expectations wiping out more than half of book
value, with Berkshire Hathaway as a new competitor, having lost access
to its only liquidity facility, and having concealed material
information from the marketplace? Can this possibly make sense?

Ouch!

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Discussions found on the web:
  1. wally commented on Jan 25

    Gosh, nobody ever explained it like that to us before.

  2. dukeb commented on Jan 25

    There’s a big difference between things making sense and things being right. Very little is right amongst human beings, but absolutely everything makes sense.

  3. SINGER commented on Jan 25

    a la “Terminator”-

    ‘There is no SENSE, but what we make’

  4. m3 commented on Jan 25

    um, if they did, the sky would fall.

    i’m grateful they haven’t downgraded those bozos. this is clearly done out of necessity.

  5. Joe Klein’s conscience commented on Jan 25

    Anyone have any idea on what hedge fund is supposedly bankrupt? Or is the sell off occurring so that the market can get another 75 bps on Monday(or is it Tuesday)?

  6. Pat Gorup commented on Jan 25

    Sure, when you consider the rating agencies are paid by the corporations that they rate.

  7. Bob A commented on Jan 25

    This is why I don’t advocate closing Guantanamo.

    Because it would be a good place to send some of these guys after this all shakes out.

  8. Stuart commented on Jan 25

    Join the club Bill.

  9. Suge Knight commented on Jan 25

    I’m betting on another 75bps cut next week, anyone else shares my view?

    Suge

  10. techy commented on Jan 25

    well i am suddenly directionless:

    so the global selloff was caused by a rogue trader, that means it was not due to risk aversion due to the coming recession?

    with interest rates low, and going to be very low, can credit markets may start function?

    mortgage rates are falling, and they can go even lower, if so will that not lend some support to the housing? and which in turn will help the financials since their papers will become more worthy?

    return on investment in bonds and CDs, savings account is falling, so equities will be considered better if only the volatility dies down?

    or is it too early to think about all the above since the coming economic data will paint the picture of recession and we will be better off having more short positions, or out of the market?

  11. jj commented on Jan 25

    Amazing how Marty Whitman and Chris Davis have become the bigggest shareholders …. they’re wrong so far , and it will be interesting to see how this plays out …. Didn’t Whitman call Ackman a “salesman” on CNBC recently when asked about they’re respective positions ?

  12. sk commented on Jan 25

    Some of the other choice bits from that Bill Ackman letter:

    “the investment portfolios of the bond insurers include a substantial amount, often a majority, of bonds that are guaranteed by either the bond insurer itself or by other bond insurers….
    A guaranty to oneself is of course worthless…”

    “We also note that MBIA reinsures Ambac, and Ambac reinsures MBIA. You must also consider the iterative impact of downgrades of one on the other”

    “More than $42 billion of this[MBIA’a] reinsurance was purchased from Channel Re, a Bermuda- based reinsurer whose only customer is MBIA. The two most senior officers of Channel Re are former executives of MBIA. MBIA owns 17% of the company.

    “Earlier this week, on January 16th, Partner Re and Renaissance Re, the majority equity owners of Channel Re, wrote off the entire value of their investments in Channel Re due to losses it has recently incurred that substantially exceed Channel Re’s capital, an impairment…”

    And still the rating agencies don’t act; worse the SEC, Justice Department or AG’s don’t come down on the agencies – since the Moody’s, S&P, Fitch have a SEC mandated lock on rating bonds – a tripoly that really becomes a defacto regulated business ( since other rating agencies like Egan can’t break in ) and when the regulators turn a blind eye..

    It brings the whole system into grave disrepute and make people extremely wary of investing in US governed securities, exactly what happened when the frauds, pump and dump schemes of analysts, to which auditors, investment banks turned a blind eye and actively connived in – frauds like Enron, Adelphia and Enron.

    The SEC had better act and do something about the ratings agencies now – before it brings the whole system down.

    -K

  13. baxter commented on Jan 25

    http://nihoncassandra.blogspot.com/2008/01/bernanke-rule-reality-based-modified.html

    The Bernanke Rule, by contrast, stipulates how much the Central Bank should change the nominal interest in response to nominal divergences of the stock market indices from levels that cause those that own lots of stocks – whether leveraged or unleveraged – to hoot, howl, cry-foul, (and this is most important distinction) irrespective of what these changes in interest rates will do to the actual rates of inflation, inflationary expectations, in comparison to any reasonable target rates of inflation.

  14. dukeb commented on Jan 25

    I hereby downgrade MBIA. And I certainly have more credibility than FITCH. Somebody please inform the financial media.

    Thank you.

  15. michael schumacher commented on Jan 25

    that and about $500 bucks will get you a release on the wires….works for the hedge funds all the time.

    Ciao
    MS

  16. Marcus Aurelius commented on Jan 25

    Oh! THAT Triple A. Now it makes sense! I thought someone needed a jump start.

  17. Stuart commented on Jan 25

    75 bps?. no. 25 bps. Market disappointed and a knee jerk selling reaction across all asset classes as we continue to be held hostage by system trading and those damn black boxes. Thinking discretionary traders are a dying species these days it seems.

  18. Suge Knight commented on Jan 25

    Dow and Nasdaq are down today, where is Bernanke? We need a 75 bps pronto!

  19. Stuart commented on Jan 25

    He may be on to something….below

    Author: Jim Sinclair

    The theme concerning the recent market drop and involving Monday morning’s Fed action is that the Federal Reserve cut rates significantly assuming a freefalling equity market to be a product of panic. This theme suggests panic is capable of producing more panic and therefore furthering the potential of the fall.

    In the timeframe leading up to and during the freefall of equity values, a major French bank was having a just recently discovered significant problem liquidating a hidden position of equities in some form or another. This liquidation by the major French Bank, although unsaid, implied that action has taken the market down significantly in the week preceding the Fed action.

    Consequently, there really is no economic or derivative problem that was at the heat of the extreme drop of equity values, nor does it mean anything that the major drop took place on the news of AMBAC bond downgrading, a major player in default derivatives.

    As such, the Fed acted somewhat in error as a result of not knowing the French bank’s activity as the root of the plunging equity values. The assumption since the bank reported a complete loss is that the French bank has completed its liquidation, all is well and the future is rosy.

    This really quite beautiful effort of plausible denial requires some critical examination:

    Question: Could a junior trader have entered into a position of such magnitude that it could make or lose $7,000 million?

    Answer: It is most unlikely as personalities making transactions of this proportion are few and far between. They know each other. At minimum, the other side or sides would have inquired with the Senior Trader if the Junior Traders knew what he was doing.

    Question: Could a transaction of this magnitude be successfully hidden for months?

    Answer: After the Warburg/Rogue trader experience, major trading entities have tightened up their accounting and audit processes to prevent just this type of act.

    It is a strain on the imagination to think that this could have been accomplished as transactions are confirmed between trading houses electronically. That confirmation process then goes to the trading entity to again confirm. Risk control in major houses then factor that into overall positions.

    How a junior trader could have short cut that procedure is hard to imagine.

    The thesis that a junior trader hid a gargantuan trade confirmation under his desk or that a procedure missed it is extremely unlikely to be factual.

    Question: What was the form of the transaction?

    Answer: By not specifically stating the media and the public would assume the trader somehow held a long position of shares that were being liquidated into the market.

    That strains one’s imagination as well because such a position would be so visible that it would glow in the dark.

    This leads one to assume the position was either a derivative on equity indices or mathematical equivalents derived by algorithms, not the world’s largest long position in US equities.

    This leads one to assume that one side of the trade, the side which was called on to perform, could not or in the case of the bank in question selected not to perform.

    As such, the loss was on a structured investment vehicle either structured by the bank in question or another.

    Rarely do these special performance contracts called OVER THE COUNTER DERIVATIVES actually perform, but rather are bought out by the losing side when called to perform on.

    Conclusion:

    The USD $7,000 million loss reported as an action of a junior trader hiding a losing position for a considerable amount of time as stated is total bull.

    You would have to be totally IGNORANT of market mechanics to buy that plausible denial.

    The public and much of the media are.

    The reported loss was a buyout of a failed to or chosen not to perform derivative.

    The world’s equity markets broke for their own reasons and not because a large French bank was selling common shares into the marketplace as the newest and rather well done SPIN would have you think.

  20. kk commented on Jan 25

    Marty Whitman and Chris Davis could care less about being right in the short term.

    Marty Whitman is legendary with his distressed debt and workout investing. It would be interesting to know what he finds so compelling on those insurers. In his mind there must be a large margin of safety.

  21. Jim Haygood commented on Jan 25

    Bill Ackman, as quoted by SK:

    “The investment portfolios of the bond insurers include a substantial amount, often a majority, of bonds that are guaranteed by either the bond insurer itself or by other bond insurers….a guaranty to oneself is of course worthless…”

    Why, they are just taking advantage of the same accounting used by the Social Security Trust Fund, which treats nonmarketable US Govt IOUs as third-party assets, despite Soc Sec being a 100% owned subsidiary of that selfsame government.

    Consolidated accounting would eliminate debts the government owes to itself, and guarantees in which the guarantor is also the beneficiary.

    Apparently the crudest forms of accounting fraud are OK, as long as it’s done boldly, on an immense scale, and with official sponsorship. Enron should have taken a lesson from Da Pros.

  22. Helicopter Ben commented on Jan 25

    1. I’m with Sinclair…the whole rouge trader thing is not plausible.

    2. You guys looking for bond insurer rating cuts should be careful what you wish for. Yeah, I’m short the financials and would like to make coinage just like the next guy…but at what cost?

  23. Eric commented on Jan 25

    One thing for sure…this is a massive run on sentence. But seriously, lots of things don’t make sense in this world. Does it make sense for Ackman to speak at the Value Investing Congress when he is not a value investor?

  24. ronin commented on Jan 25

    It would be interesting to know what he finds so compelling on those insurers. In his mind there must be a large margin of safety.

    Is he expecting a bailout?

  25. Suge Knight commented on Jan 25

    I just went long, what the hell? Bernanke, help out your boy here with a 50bps before the close? I’m hurting!

  26. ECONOMISTA NON GRATA commented on Jan 25

    I just heard a rumor that MBIA was downgraded by DUKEB.

    HOLY SHIT……..!

  27. John commented on Jan 25

    “Triple AAA” – so that’s like 9 A’s. It must be good with nine of them.

  28. Whammer commented on Jan 25

    WHY WHY WHY did I go long MBIA right before the DUKEB downgrade??????????

    Kill me now.

  29. Ken Houghton commented on Jan 25

    At “AAA,” they have some good company–Louisville, for instance, draws about 1,000,000 fans a year.

    But at least they’re not in the Big Leagues. They insure trains, right? And the train business has been sinking since the Interstate Highways Acts of 1952 and especially 1956 turned moderately wealthy Americans into suburbanites.

    (Of course, I just now heard something about MBIA and Ambac–that’s the duck in the commercials, right?–having problems. It was a scoop on the cover of yesterday’s NYT. That’s probably where Ackman heard about it.)

  30. birddog commented on Jan 25

    My father, a country doctor who amassed a great deal of land, had a memorable saying(one of many) “Things are nver as bad as they seem, they’re worse!!”

  31. k commented on Jan 25

    I want to buy MBIA ….. kk says it’s ok to be long , even if the stock is down 75% from when you first bought it …. never too early , even if your funds underperform

  32. kk commented on Jan 25

    k, Whitman is a long term investor, and takes positions that he might hold for years. I think at this point I would give him the benefit of the doubt. He has earned it.

    Whitman has given his investors huge long term returns with alpha that managers dream of. Third Avenue Value 16.11% annual return since inception 1990, S&P 9.54%.

    He was also a huge buyer of Kmart debt a few years ago when they were on the ropes, and that turned out to be a homerun.

    His shareholder letters are available on his website. You should give them a try. They are a great read.

  33. Ad Absurdum commented on Jan 25

    If so, then Argentina’s debt ought to get a quadruple A rating.

  34. CreditGuy commented on Jan 25

    kk,

    M Whitman has a stellar track record no doubt, but not without its black eyes. One of his biggest losses ever came in the last few years as he bought up $250 million of Collins and Aikman bonds at 60 to 80 cents on the dollar. His rationale was painfully simplistic and DEAD WRONG. As in NOT EVEN CLOSE. They ended up being worth ZERO. Dont expect much different here. And never make individual investments on others peoples’ trackrecords. That is an often made rookie mistake. Do your own homework.

  35. Eclectic commented on Jan 26

    I long ago on this blog described something, a philosophical mindset I called:

    “Optimistic Willfulness For Its Own Sake”

    That heading statement puts it to poetry.

  36. Jay commented on Jan 26

    The AAA surely represents the U.S. Federal Government’s near 1 propensity to bail out troubled financial companies.

  37. Winston Munn commented on Jan 26

    This is so confusing. Whitman says to invest for the long run, but Keynes said in the long run we are all dead.

    So am I trying to gain my 16% return in order to have a better funeral or am I to convert my portfolio to traveler’s checks and take it with me?

  38. touche commented on Jan 26

    “This is why I don’t advocate closing Guantanamo.

    Because it would be a good place to send some of these guys after this all shakes out.”

    Ralph Nader should have waited until this election to run.

  39. Karl K commented on Jan 27

    The Ackman letter is an amazing document, but as one of the earlier posters said, “do your own homework.” Ackman’s arguments while strong, are not necessarily foolproof and in fact don’t address some very important issues here and, in some cases, display some rather blatant irrelvancies.

    1. Ackman doesn’t address the length of the time over which losses will happen. The analysis needs to put yearly claims payments on one side and premium income/portfolio income less expenses on the other side and compare the outcome. Really, keep this in mind: All the mark to market adjustments killing the banks are irrelevant to a bond insurer. The risk the monolines face is whether investors lose principal and interest on the underlying investments and trigger their guarantees. Even if the guarantee is called, the monolines pay out claims on principal only at the original redemption date so the NPV exposure is a fraction of the notional sums insured.

    2) One needs to do 2 above in an ongoing concern basis and in a runoff scenario. See what happens — even if it means, believe it or not, that these entities can make it as ongoing concerns.

    3) When one is doing 1 and 2 above, one needs to address a possible, but still low probability, armageddon type of scenario in the housing market and the overall economy. Warburg did exactly this and figured that the conservative value during a runoff for MBIA would be about 30 dollars

    4) Ackman argues that the rating agencies should look at market prices to come up with their opinion. This is certainly ironic, if not downright hypocritical, since that may be in fact what they did when the monolines were in the stratosphere.

    5) Ackman makes a big to-do about Buffett entering this business. So what? Should the rating agencies focus on that event to come up with a claims paying assessment? It’s irrelevant.

    6) The monoline’s difficulty in raising capital may be entirely due to fears in the market — fears which could dissipate — and hence the rating agencies shouldn’t deal with that. They should only address with whether capital is needed, and how much, not how hard or easy it is to get.

    Finally, to reiterate, Ackman is talking about are mark to market losses in a portfolio that is supposed to be kept until maturity. The real economic losses will occur when claims are paid.

  40. kk commented on Jan 27

    CreditGuy, I agree that one has to do their own homework, and I’ll also throw diversification and time horizon into the mix.

    Every great investor has made well publicized bad trades that in hindsight seem so obvious, and all haved suffered at one time or another with periods of underperformance.

    On that note it will be interesting to see where the Eddie Lampert/Sears Holding journey ends up. Operating a retail business and capital allocation seem to me to be two areas that are polar opposites. We all know he can allocate capital, but I have my doubts about Lampert being able to turn around a struggling retailer.

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