A Common Sense Look at MBIA 9 comments
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There have been some authors on Seeking Alpha over the past couple of days who have taken it upon themselves to shout from the rooftops "Ackman's a self-serving thief! Ackman's a self-serving thief!" while laying out their arguments, er, should I say MBIA's (MBI) arguments, and infusing their own little twist. I've decided to use a logical approach to the situation and ask some questions.
First, some disclosure: I don't know Ackman, never met him, and I am not long or short the insurers, although I do own Citigroup (C) puts, which would see an indirect benefit if the insurers were downgraded.
1. If Ackman's firm's analysis is completely incorrect and MBIA is financially secure then:
Why didn't Mr Buffett attempt to acquire the entire firm?
Why haven't any international or domestic firms acquired the firm?
It's a fantastic value at this level if it's actually financially secure, and I know there are people out there who find good values a lot quicker and better than I do.
Why are they unable to raise a proper amount of capital to ensure liquidity and financial security? With the way the USD has been acting we should be seeing international firms pouring money into MBIA if there's no significant danger.
2. If Ackman's firm's analysis is even somewhat correct and MBIA is in trouble then:
The fact that none of the above has occurred would make perfect sense.
The aggressive response from MBIA would make sense (people hate eating humble pie and from the looks of things, each of the execs involved are going to have an entire pie to themselves).
Folks, let's be real here. I'm young enough that I had just turned two years old during the crash of '87 but I have been able to glean some wisdom over my short years. We're living on the edge right now, economically-speaking. While we're not going to zero and we will pull through this and the U.S.A.'s economy will prevail, we shouldn't walk alongside a cliff with our eyes blindfolded. If people would accept the tough medicine now and get it over with we'd be out of the woods within five to ten years, maximum. And YES, I understand what that means for people of my age. It would be a very tough time for us. I want this country to get back on its feet and start running again, but we won't be able to do that until we deal with the monster standing in our way (which we've created).
Also, a little piece of advice for those of you who write articles on this and other sites. I recommend refraining from the personal attack piece of your argument which you seem to love to use. It only detracts from the actual message, if you even have one. Finally, as I mentioned above, our economy will be stronger than ever in time IF we suffer our consequences now rather than later. I believe in the strength of the U.S. I believe in our unique ability to create new financial instruments and lead the world economically, but something needs to give in the short term. Keep in mind, I hope I'm wrong about all of this. However one thing I have learned is that when it comes to the financial markets, we should leave hope to the Pope and not our portfolios.
Disclosure: I own Citigroup Puts
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This article has 9 comments:
"Why did Warburg Pincus double-down on their original investment in MBIA if they thought that they would be throwing good money after a bad investment?" or/
"Why was Marty Whitman's Third Avenue Value fund averaging down on their investment in MBIA through the end 2007?" Whitman's number crunching abililty is legend, and he has a 1/2 century more experience than Ackman. or/
"Why would Chris Davis of the Davis Select, with an bonafide expertise in investing in financial companies, make a big purchase of MBIA common stock at the end of 2007?"
I decided not to short MBIA for this exact reason. Take a bunch of stocks that traded around $100 and are now hovering below $10, and a government guarantee immediately rockets them up to $50. Not the kind of risk I want as a short, and the options were already pricing in a quick trip to zero.
Well yes but (A) it hasn't been exactly easy for first time buyers to get a decent home in recent years, or at least if they did they're most likely going to find themselves in a negative equity trap that will stay with them for some years, limiting,say, there ability to move to a new job in a more prosperous area. And (B) if we sweep this mess under the rug for another N years they're not getting any immediate benefit and are most likely to get into an even deeper neg-equity trap down the line. Or those that can't afford a home will be living in rented accomodation for several more years and thus won't be building up equity that they can use to enjoy life further down the line.
I suspect a lot of young people that don't own a property will be watching the credit-crunch and falling property prices with glee. For some years now it looke dlike the property market was getting further and further out of reach of the average earner. Now there is some hope in sight and hope is a good thing.
Will current MBIA common stock holders be rewarded after a few years of waiting, with their eyes focused toward the dim light at the end of the credit crisis. Time will tell. One thing is certain, the traditional monoline business is not dead...Buffet has confirmed this with his own entrance into the marketplace.
The smart money was obviously early (ie. Warburg Pincus,Marty Whitman, Davis Select Funds, etc.) on this bet that MBIA will first survive, and then eventually thrive again. Early doesn't make these folk ultimately wrong. As for Ackman, one can stay too late at the party...but greed is a bitch to leave unattended on the dance floor when you've been having so much fun with her.
exactly why I have both calls and puts; one is going to win out over the other; I'm betting the appreciation of the winner will cover the depreciation of the loser; just one person's approach
what I don't like is the 3-5 day ultimatum
The systemic risk is with policy holders and holders of insured debt. It's really amazing how many fools out there think the government would bailout stockholders given the risks already on the government balance sheet.
jbd.
He pretty much just did- the part he wants, at a ridiculous price. I'm also reminded by the phrase, "Why buy what you can kill?"
**Why haven't any international or domestic firms acquired the firm?
I flipped through January and February SEC filings and on a round number basis you can get to about 2/3rds of MBIA is owned by about 8 entities- so, they've bought a bunch. It may get hard to cover a short position, actually.
**Why are they unable to raise a proper amount of capital to ensure liquidity and financial security? With the way the USD has been acting we should be seeing international firms pouring money into MBIA if there's no significant danger.
MBIA is up to about $US 2.65B in capital it raised. Every time a rating agency increases the AAA threshold, they exceed it... then the rating agencies change their mind. And they don't question the ability for the insurers to cover claims, except in a very, very, very depressed scenario... to which they even then add a premium.
**2. If Ackman's firm's analysis is even somewhat correct and MBIA is in trouble then...
Ackman's focus seems to be that he can short the ABK and MBIA holding companies via stock/options/CDS and create enough panic to get regulators to suspend the premiums being collected from the underlying insurance companies to the holding company parent. This would result in the insurance companies continuing to exist in a run-off situation while the holding companies go bankrupt. If this occurs and the insurance policies expire over the next 40 years with no insurance payment defaults, history may look back at Ackman as one of the greatest conmen ever.
Ackman has been largely accurate, and has played some role in forcing these companies to obtain more capital. If there are no defaults, he may be considered as part of the reason this did not occur, rather than your foolishly hypothesized conman argument.
Nobody knows what future default rates will look like but suffice to say that the leverage which MBIA operated with while still able to maintain AAA was and is simply absurd.
The ratings agencies have been horrendously fraudulent, and while it might be frustrating that they keep raising the bar, there is a very good reason: they are running scared and unable to keep the fraud going.......game over.
jbd.