What's Going on with Bond Insurers?

I first came to look at investing in the bond insurance debacle when I saw Ambac (ABK) and MBIA (MBI) losing share value fast. Previously, I had no real idea that bonds were insured; I thought AAA depended on the finances of the community, city, etc... issuing the bonds and not on a rating agency's word. So, I was wrong, and it was then that I took a short position on the company via options. Subsequently, as my initial investment lost value, I began to understand that these stocks were not in the least like other companies losing value lately.

Even though it was obvious that there were more sellers than buyers, I realized that they also had a lot of support at a certain level. I thought that if I averaged down, I could at some point post a gain. Lately, I remember a particular Friday where news of a 'bailout' turned the markets around and sent them into a frenzy for next few days and today, where once again the 3 digit loss turned into a 2 digit loss due to the NY commission's 'progress' into the funding of said company.

There are 3 or 4 consortiums out there that have gigantic short positions on both 'monoline' insurers. They've known about the companies' unprofitable positions since last year and they haven't been wrong. They've been interviewed on Bloomberg several times, and one fellow has made a congressional appearance too. I intend to follow their positions much like people follow other major investors. When they buy back the shares, I too will sell my put at market and buy calls instead. This is from a CNBC article:

However, if MBIA and Ambac’s losses are as large as Ackman suggests, the rating agencies will have no choice but to downgrade them. That could then scare potential investors away from a private market bailout of the bond insurers, as well as make the New York State bailout plan much more difficult.

So, the NY bailout plan is still proceeding, even though the ratings haven't changed. From my vantage point, it sure looks like NY could be taking on a whole lot more than it can swallow. On the other hand, there are a lot of other companies' fortunes riding on this. Namely, the reinsurers.

Whoever thought of insuring bonds? It seems like a fishy proposition from the outset.

Disclosure: Author holds a short position in ABK, MBI

Comments

[fxtrader07:]

Sorry, but this is as silly an article as can be. You confess you do understand ZERO about the bond insurance industry. Still, you think these stocks are a short her. That in turn is based on - other "smart" guys being short as well???
Heck this is the very counter-thesis to generating alpha, this is generating negati´ve alpha with a 100% gurantee built in.
give me a breakl!
you will get burnt with your shorts, rest assured. There are very smart guys who already took the long side of the trade (e.g. marty whitman and third avenue) and contrary to you and the short consortia they know a lot about this business!!
and , let mea ask you: how are you supposed to find out that "they" exited their short positions??
I mean, before the stock doubled?
really, one of the most useless articles ever published on seekingalpha

2008 Mar 05 09:07 AM

[john haskell:]

Steve- since you are a total newbie to this area, a bit of advice. Don't worry about the monoline ratings.

The path has already been cleared by ACA- that is, the path from AAA to bankruptcy. The rating agencies have been practicing up for this, taking AAA rated CDO's down to CCC in a single step. They won't downgrade the monolines, the monolines will just show up in BK court, blaming Ackman the whole way.

Marty Whitman is a smart investor and he will lose his entire investment. He will still be smart, but this one particular idea wasn't. It's OK- Buffett bought shares in USAir after all.

2008 Mar 05 09:55 AM

[ct_programmer:]

I just can't help jumping in on this one. "Whoever thought of insuring bonds?" Hmmm.... I guess all of the municipalities really didn't know what they were doing and just decided "hey, let's throw some money away!" (maybe they should have all consulted with your first). I get tired of reading these "articles" where people keep saying that municipalities didn't need to buy any bond insurance because they rarely default. Maybe a big issuer like the State of California, where everyone across the country knows their financial position, but what analyst is going to spend the time generating a credit rating for some few million dollar bond issue for a school in Podunk? The idea behind the bond insurance is more about liquidity, not problems with defaults. By "borrowing" the bond insurer's credit rating, the bond offering goes much more smoothly by not having to scrutinize every aspect of every bond issuance. Which is exactly why you're now seeing a decline in the rates of offerings using bond insurance (whether from Berkshire, Ambac, MBIA or anyone), because it is NOT making it go smoother currently. It is having the opposite effect lately due to the anxiety of questioning whether the bond insurer will be there pay if a default happens. Eventually, this will blow over and it will go back to the way it was because there was a benefit to that system. The players may change, but the game will remain the same.

2008 Mar 05 10:07 AM

[beachtango:]

We live in a great country where one can publish unfounded information. Ct_programmer, I agree that it seems like a spreading disease how people have jumped on the , there's no need for bond insurers! For heavens sake, what is wrong with everyone, it's like they drank that Ackman punch!,...Warburg, Third Avenue, Davis select, and other investors not divulged have made millions of dollar investments "RECENTLY." I suppose they too like municipalities throw money away. I cannot wait to see these stocks double, and our economy to improve so that these negative, unhappy people have some more stupid things to say...,.

2008 Mar 05 09:40 PM