Ambac, MBIA Are Still Shorts Amidst This Wink-and-Nod

Includes: AMBC, MBI
by: Whitney Tilson

So MBIA and Ambac both raise $2.5-$3.0 billion (assuming the Ambac deal happens), the big two ratings agencies reaffirm their AAA ratings (though it'll be very interesting to see what Fitch does), the stocks soar and the shorts discover (yet again) what a crappy business shorting is -- so it's time to cover and move on, right?


Here's what happened: everybody -- the ratings agencies, regulators, big banks, etc. -- are petrified (probably with good reason) about the consequences if MBIA and Ambac lose their AAA ratings, so there's a big wink-and-nod going on here. The companies raise enough money to give the ratings agencies some cover to reaffirm the AAA rating, the ratings agencies do so, and this buys some time (not much though -- in 60 days or so, they have to report Q1 earnings and if you thought Q4 was bad, wait until you see Q1!).

Though a bit more time is valuable -- you never know when Congress might bail out millions of mortgages -- this kabuki dance is likely to be meaningless in the end because these companies are unlikely to be able to write much new business and, more importantly, are likely to incur tens of billions of losses.

Re. the former, I've heard from people in the market that bonds insured by MBIA trade at a 15 bp discount to bonds insured by nondistressed bond insurers (like Berkshire). To compensate for that (and because premiums are front-end loaded), MBIA would have to charge a 50 bp lower premium, which is enormous given that the total premium for munis typically ranges from 30-80 bps. No banks or other institutions will tell you this, however, because they're loaded to the gills with MBIA-wrapped bonds and want to prop them up...

To get an idea of how utterly corrupt the ratings agencies are, consider that a year ago, S&P said MBIA would have zero losses from its subprime exposure. Then in July, it upped this to $64 million. Then in December, it said $5.5 billion. And earlier this week, as part of its report reaffirming MBIA, it now says $9.5 billion (the media hasn't picked up on this number yet) -- but it still maintains the AAA rating!!! But the market isn't fooled one bit -- here's's Doug Kass yesterday morning:

Here is an even better comparison of Pfizer (NYSE:PFE)/MBIA (NYSE:MBI). Pfizer's credit default swap spread is only 38 basis points. MBIA's credit default swap spread is 603 basis points.

Yet they are both AAA.

For comparison, Pakistan's credit default swap spreads stand at 534.

As I wrote in today's opening missive: If you want AAA, buy batteries, not MBIA stock.

And here's an excerpt from Kass's article:

I was struck by the genuine and remarkably talented performance of David Archuleta and how that contrasted with the insincere AAA rating given by Moody's and Standard & Poor's to MBIA (MBI) and the equally disingenuous commentary of MBIA's new CEO, Jay "Our Ratings Are Stable" Brown.

The good news is that David Archuleta's rendition of John Lennon's "Imagine" will undoubtedly catapult him into the favored position to become 2008's American Idol -- and years of well-deserved fame into the future.

"You may say that I am a dreamer," but my ludicrous forecast is that, over time, David will become more popular than Kelly Clarkson.

In "American Idol" terms, MBIA is the William Hung of finance. If MBIA was a performance on "American Idol," Simon Cowell would have laughed the company off of the stage.

"He lies like a finance minister on the eve of devaluation." -- Warren Buffett

The bad news is that the ratings agencies should be tarred, feathered and litigated against after maintaining AAA ratings on MBIA recently. There was little reality in what Jay Brown said in his CNBC interview with Michelle Caruso-Cabrera on Tuesday afternoon, but investors and the media (with the exception of CNBC's Charlie Gasparino) seem content to accept his views as gospel despite the fact that Mr. Brown had previously guided MBIA into its derivative insurance disaster years ago.

Importantly, AAA long-term debt ratings are intended to be reserved for only gilt-edged companies. (For a full explanation, click here.) AAA is the highest rating extant given to investment grade companies, so giving MBIA a AAA rating underscores the hoax being perpetrated by the ratings agencies. Some might call it conspiratorial.

Remember that, in only the last few days, MBIA has posted a $1.9 billion loss in its latest fiscal year, has eliminated its dividend, has temporarily stopped writing guarantees on asset-backed securities, its CEO "has questions" regarding the company's preliminary results reported in January and has refused to sign off on the company's 2007 financial statements, and the company was forced to raise $2.6 billion in capital.

More from S&P on what's happening to the underlying loans:

S&P examined how dependably people are repaying their debt for five types of loans: home-equity lines of credit, subprime loans, Alt-A loans, closed-end second-lien loans and prime jumbo loans.

For nearly all these categories, delinquencies have accelerated in the past year.

The delinquency rate was the worst for pooled subprime loans, or loans to people with bad credit. For pooled subprime loans issued in 2005, the delinquency rate is 34.4 percent, S&P said. Delinquencies have soared as much as 15 percent for some subprime loan pools.

Every day, Ambac leaks out a little bit more information (to try to prop up the stock while it tries to get a deal done, I assume). Here was yesterday's news:

Cerberus to participate in Ambac's bailout plan: report

By Sue Chang Last update: 3:57 p.m. EST Feb. 27, 2008 SAN FRANCISCO (MarketWatch) - Private equity firm Cerberus Capital Management is expected to participate in a plan by several banks to bailout Ambac Financial Group, CNBC reported Wednesday. The exact details of Cerberus' contribution is not known but it is expected to be a "substantial" amount, according to CNBC. The bailout plan is aimed at bolstering the company's capital to save its AAA rating.

Here was the "news" from the day before:

The group of banks working to bail out Ambac Financial Group includes private equity and other financial firms that have no exposure to the troubled bond insurer, signaling optimism that Ambac will be able to make money in the future, CNBC has learned.

These contortions/rationalizations are comical:

Following the review's completion, Moody's is keeping the negative outlook on its ratings because of uncertainty whether MBIA's plans will come to fruition.

Moody's estimated that MBIA's stress-case losses would be about $13.7 billion and the company has about $16.1 billion available to pay them. That capital ratio of 1.2 is "significantly in excess of the "minimum" AAA level but short of the 1.3x AAA "target" level by about $1.7 billion."

Nevertheless, MBIA's position "was determined to be consistent with a AAA rating," Moody's said, citing the insurer's plans to raise more capital.

Yeah, right! They're done until they see Q1 losses...

MBIA Inc Chief Executive Jay Brown on Wednesday said he does not expect rating agencies Moody's Investors Service and Standard & Poor's to take any action on the company's ratings for up to 18 months. "I think what you heard from Moody's and S&P this week is a very clear picture that they are done for 12 and 18 months with us," he told Reuters in a telephone interview. Both of the rating agencies earlier this week affirmed the top triple "A" ratings for MBIA's insurance unit, easing market concerns.

Disclosure: Author is short MBIA and Ambac