MBIA DESERVES to Go Belly Up

"DESERVES to go belly up" seems to be our latest new series, but its not. Instead, this is the 2nd — and hopefully last — example of a lousy company whose value has been greatly diminished by poor management threatening or actually suing an analyst/fund manger/critic. (Our 1st example being BankAtlantic).

The latest act of wanton idiocy from corporate assclowns: Suing critical analysts and fund managers who have brought to light the malfeasance of management in running the firm into the ground.

The beleaguered management of the moment is the team at MBIA (MBI); they are "considering" suing Bill Ackman of Pershing Square. The basis of the suit, as reported by Bloomberg, is a somewhat obscure
NYS law against spreading false rumors or making statements "untrue in
fact” about an insurance company’s insolvency (I do not know if this
law was constitutionally tested for passing 1st Amendment limitations, but that sure is an interesting question).

There are few absolutes in investing, but this may be one of them — I always run-not-walk-away from any firm that engages in this sort of corporate silliness. Rarely will you stumble across a less productive, more foolish
admission of unsuitability to be running a public firm
than suing your critics. All it does is draw more attention to your
past foibles, incompetencies, and random errors.

Since that seems to be what management wants, than we shall happily accommodate them with a brief history of their unconscionably gross mismanagement.

Like Ambak (ABK), MBIA ran what was an enviably low risk, high return business. They sold a product that was more or less unnecessary — Muni Bond insurance — to willing buyers that saw a decrease in borrowing costs once they bought into the game. I don’t buy into the notion that muni bond insurance is a scam, but it comes close: Fund buyers got insured paper, Muni borrowers got lower rates (therefore saving on borrowing costs), and ABK/MBIA got well paid for insuring bonds that went bust at one of the lowest rates of all classes of fixed income paper.

As we noted back in January, that high profit, low risk situation — despite its enormous profitability — was obviously intolerable. In came the
financial engineers, as the thought process seemed to be "Hey, we should be issuing insurance on riskier paper — think about how much much bigger the premiums are than boring
old munis!"

Was it Ackman, or management that brought down the stock? Let’s take a quick look at some charts to see where the market first started to recognize the fundamental problems at MBIA:

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Volume Begins to Pick Up Amongst Bad Earnings and News
Mbia_2007_churn

Chart via Bloomberg, FusionIQ

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Note the chart above; from May to July/August 2007, the average daily volume moved from 2 million shares a day, to nearly 5X that amount. Several days saw 10-12 million shares. That strongly suggests the marketplace was not liking what it was learning about MBIA, or their exposure to riskier segments of the credit markets.

The actual news that Summer was increasingly discouraging for the monoline insurers: Two of Bear Stearn’s hedge funds began blowing up due to sub-prime issues. In July, MBIA had a disappointing earnings report; Part of the reason were losses of 9.6 million from investments in these failed hedge funds run by Bear Stearns. I cannot imagine why an Insurer would be an investor in hedge funds, but to me that suggests very irresponsible decision making from the management of MBIA.

Previously, the CEO had been fired ("resigned" was the official explanation), and CNN reported "amid industry-wide crisis, former CEO
Joseph Brown assumes control." This is rarely a good sign.

There was even more evidence of trouble back in 2007: MBIA Credit Default Swaps were trading at Junk levels — despite being rated triple AAA.

"If you expect more headline risk, they’re a logical choice to short,” said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut, said of MBIA (Bloomberg). As credit quality weakened, those bets paid off handsomely. 

The next few major volume days were nearly 18 million shares and almost 30 million shares on several big downside moves. Then on December 20th, the stock gapped down from $27 dollars, and traded to $19 — on 52 million shares.

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Huge Down Volume on May Breakdowns
Mbia_big_down_vol

Chart via Bloomberg, FusionIQ

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Note that the news seemed to have been acted upon more urgently in November and December, as the mortgage crisis and subprime problems spread rapidly. The huge volume suggests that the news was widely acted upon by many market players.

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My biggest issue with both of these suits is the chilling effect. Markets operate on the principle of freely exchanged information leading to the Truth. Nothing should prevent good faith analyses from being produced and disseminated.

Thomas Jefferson believed that truth would triumph in the free marketplace of ideas.  Anything that gets in the way of that process should be abhorent.  "I am for freedom of the press, and against all violations of the
Constitution to silence by force and not by reason the complaints or criticisms,
just or unjust, of our citizens against the conduct of their agents"
Thomas Jefferson 1799. ME 10:78 

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This was not supposed to be a continuing series — but unfortunately, seems to have become one. Last month, we noted that BankAtlantic DESERVED to Go Belly Up
for their suing Dick X. Bove. 

As noted, suing an analyst over a report is akin to blaming the shorts for
your stock price: It is a waste of time and corporate resources, a huge
distraction to management. As wee noted last time, investors can deduce a valuable piece of
information from the issue: They don’t want to own
BankAtlantic Bancorp (BBX), as it is apparent to this observer that management’s priorities are misplaced, and with
the stock at $2, they are spending precious capital and wasting time on nonsense.

Here we are again, only this stupidity is via the extremely dumb management team at MBIA.

I haven’t met either management team, but I can only assume that they are as dumb as the Alaskan night
is long in the dead of Winter. Even better, I assume their attorneys are bunch of asshats also.

The silver lining to litigation is that the defendant gets a tremendous amount of discovery. That includes access to corporate files, personnel reviews, internal memos, anything "reasonably relevant to the issue in controversy. Since MBIA will have made the gravaman of Ackman’s claims at issue by litigating, he gets access to ANYTHING that could help prove his claim.

Let me enter lawyer mode for a moment, with the caveat that I haven’t practiced in decades: Ackman
should immediately countersue
(Bove’s firm probably doesn’t want to, but
they should). 

Why? In the event that plaintiff eventually drops the litigation — which I bet they will do before it progresses too far — they no longer will have to respond to discovery requests. The countersuit prevents that escape, as Ackman now gets to defend his reputation, put into issue by MBIA.

Quite bluntly, I doubt either management team has the stones to pursue litigation to its logical conclusion. But a countersuit keeps the discovery process in the hands of the defendant — not the plaintiff. If that defendant is Ackman, I sincerely doubt that management wants him to see what they knew, and when they knew it.

Ackman should welcome the suit — and the opportunity to discover what management has not been forthcoming about.

Previously:
BankAtlantic DESERVES to Go Belly Up (July 2008)
http://bigpicture.typepad.com/comments/2008/07/bankatlantic-de.html

Counter-Party Risk  (January 18, 2008)
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

Source:
MBIA May Sue Short-Seller Ackman’s Pershing Square
Christine Richard
Bloomberg, Aug. 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYYyVJGvOm98&

MBIA, Ambac Risk Trades at Junk Levels on Subprime Defaults
Christine Richard and Shannon D. Harrington
Bloomberg Data Service, July 18 2007
2007-07-18 16:37:42.810 (New York)

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What's been said:

Discussions found on the web:
  1. 2daysinsept commented on Aug 11

    WTF is going on with the double shorts today, BR? SEC rumors, anyone?

  2. Eric commented on Aug 11

    What would be the cause of action for a counter complaint? The only thing I could think of is malicious prosecution, and that would have to wait until the original action is either defeated or dismissed with prejudice.

  3. Wayne commented on Aug 11

    “they are as dumb as the Alaskan night is long”….about a month ago that would have been about 2 hours… :)

  4. Donkei commented on Aug 11

    “Such is the irresistible nature of truth that all it asks, and all it wants, is the liberty of appearing.” Thomas Paine

    I’d counter-sue for defamation, and then the whole suit can be about which party is really telling the truth.

    Unfortunately, a court of law is not the best forum for discovering truth. The funniest line I ever heard on the Ally McBeal show was when a 2nd chair lawyer stood up in the middle of a defamation lawsuit and out of nowhere pointed out that, as truth is an absolute defense to defamation, it should never be brought in a court of law, because how can you get to the truth when all that happens in court is that the two sides lie about each other?

    I’d take markets over courts, anyday. And I’d say the markets have already spoken about the merits of the suit against Ackman.

  5. John commented on Aug 11

    I’m positive there is a federal law concerning spreading rumors about solvency about banks. Whitney next?

  6. AC commented on Aug 11

    Kinda reeks of good ole OSTK now doesnt it?

  7. Jeff commented on Aug 11

    On a possibly related note – with SRS near a 52-week low and SKF continuing to get pounded? How else can one explain it given the market fundamentals? Oh yeah, that’s right, the markets are ALWAYS efficient and right…….

  8. Darkness commented on Aug 11

    But a countersuit keeps the discovery process in the hands of the defendant — not the plaintiff.

    An analyst’s dream. All your confidential papers are belong to us.

  9. Eric Davis commented on Aug 11

    Too bad life isn’t about what people deserve….

  10. Juhuti commented on Aug 11

    I think they’re angry that someone decided to read the footnotes of the 10K and read the proxy. At least the 10K is audited so it’s harder to hide the truth (unlike the 10Q’s). Someone does their homework and the bank wants to sue. Give me a break. It’s not a rumor if your NPA’s, chargeoffs and loan loss reserves continue to increase each quarter.

  11. john haskell commented on Aug 11

    I hear that Gary Matsumoto at Bloomberg and Brian Burrough of Vanity Fair are working on an in-depth expose proving that MBIA was brought down by malicious short sellers and rumor mongers.

  12. VennData commented on Aug 11

    What bright rising star at a spic and span hedge fund has shorted all the firms suing analysts against a Russ3K long? In fact, why not an ETF; the iShares meSue? A double – ney, triple – short fund containing all the firms suing analysts?

  13. Mother Teresa commented on Aug 11

    Corporate asshats (I personally prefer to assclowns) are simply trying to defend their malfeasance with force – a very common tactic of wickedness and debauchery. What do they call that again? Oh, blaming someone else for the problems you created.

    The truth will set you free. And, the American people know the truth. Wall Street and Washington are a den of vipers.

  14. Dr. Kenneth Noisewater commented on Aug 11

    Yeah WTF I thought the naked short ban expired? Let’s see some blood on the street…

  15. MarkTX commented on Aug 11

    “Deserve’s got nothin’ to do with it”.

    – Will Muny, The Unforgiven

    MBIA is a “model” US Financial Co.

    TPTB cannot afford to have the model broken.

    So a lawsuit may or may not be about going after someone who openly shorted the stock,
    but in
    The Big Picture, it is another attempt at making sure people do not step out of line/rock the boat – truth be damned.

  16. shtove commented on Aug 11

    “considering suing” generally means “not going to sue”.

  17. Mike in NOLa commented on Aug 11

    “Quite bluntly, I doubt either management team has the stones to pursue litigation to its logical conclusion.”

    It will be the bankruptcy trustee’s decision :)

  18. Vermont Trader commented on Aug 11

    Just a hunch but I think Ackman might be able to afford better lawyers…

  19. MS commented on Aug 12

    The thing that makes me laugh is the price of MBIA’s latest bond issue – $1 billion raised when it was still AAA – and they had to offer 14%! Now that it’s A2, the bonds are trading at around $60.00.. for A2 paper? Are you kidding? They are an absolute joke (as are the ratings).

  20. dan k commented on Aug 12

    MBIA may not be a scam, but buying its products was like buying the “warranty” at Sears for a toaster

  21. Brian commented on Aug 12

    This is all bluster. The last thing MBIA wants is Ackman rooting around in their dirty laundry once discovery starts. I’m surprised he’s not on CNBC begging them to sue him. He’d have a field day.

  22. monday1929 commented on Aug 13

    Can Citi, JPM, Merrill be sued for spreading false rumors about their solvency?

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