MBIA Turns Thuggish

When it comes to the monolines, I've had quite a lot of sympathy for MBIA in general and for its CEO Jay Brown in particular. But if he carries on like this, that sympathy won't last long:

MBIA Inc. said it may sue Bill Ackman, striking back against the hedge fund manager who waged a six-year campaign against the bond insurer and said this year that the company may be insolvent.

MBIA is "assessing all our options, including litigation" against Ackman's Pershing Square Capital Management LP, Chief Executive Officer Jay Brown said on a conference call today.

Litigation is a very, very, very bad idea. The immediate upside is negligible: what could MBIA hope to achieve from bringing such a case? And the long-term upside isn't much larger: while a handful of people might have second thoughts about publicizing their analysis of MBIA, investors more generally will simply assume that MBIA is trying to prevent them from reading negative analysis, and will mark down MBIA's securities accordingly.

Ackman is tenacious, but he's no criminal, and he doesn't go around threatening the companies he's shorting. Similarly, neither should they threaten him. Open, transparent debate is good; anything which serves to quash that debate is bad. The irony here is that Jay Brown is extremely good in such debates: he's clear and easy to understand and quite convincing, most of the time. He should engage in them more often, rather than resort to thuggish tactics like this.

Comments

[eesquared:]

Open and transparent debate is one matter. But amassing large sums of money, by way of a hedge fund, to then pound down an otherwise low volume stock until long term, small guy, shareholders sell is manipulation. Ackman should be sued, not because he is criminal, rather he finds legal methods to swindle thousands of working Americans out of their hard earned retirement savings. If it turns out that MBIA and Ambac survive and in 3 years are healthy companies, than all Ackman did was use hedge fund power to steal retirement savings from innocent people.

2008 Aug 11 09:17 AM

[Ishortyou:]

AMBAC and MBIA are cracking open CDO-ABS-MBS-SIVs containing fraudulent loans. AMBAC is cracking open 84,000 of them, many rated triple A but the examination is revealing that those 'triple A' ones contain JUNK so it will take some time to remediate their books. The other suggested strategy is to sell their CDS and policy contracts on these triple A rated-JUNK to bottom feeders for an 'attractive price' with this they will achieve a good capital/liabilities ratio to regain their triple A status and write new public high quality business again.

2008 Aug 11 09:24 AM

[glassbox:]

Salmon, I ask you. If you were a shareholder of MBIA and you know very well that there is one guy out there always ready with a loaded gun to shoot you on every move you make. This guy is not a shareholder, in fact - his intention is to shoot you. What would you do? I hazard one can do 2 things: sell the stock and cease being a shareholder and secondly: fight for what is rightfully yours. As the appointed CEO of MBIA, Jay Brown has a duty to all the shareholders (yes only to shareholders, not shorts) to protect the integrity of operations and that includes industrial criminal acts like espionage/rumour mongering and the likes. What is the point of engaging in a so called 'gentleman debate' when you know the other side's objective is to shoot you. You can only 'debate' when the guy is prepared to put down the gun and work a way out that is win win. Unfortunately, Ackman has come out very clearly that he is prepared to have only one winner and a dead target.

2008 Aug 11 09:38 AM

[CT Programmer:]

Another component of this is that there is ongoing public debate about regulating areas like this. Brown is just putting this out there as more general support against allowing manipulation of stock prices by individuals like Ackman. It's one thing to short a company believing that it will go down, and its another thing to do that and walk around with a bullhorn telling everyone its going to go down hoping that will make it go down farther. I don't think MBIA has any intention of suing. They're just posturing to get the message out, and maybe just maybe make some other hedge fund manager think twice in this regulatory-prone environment. That's good for shareholders. I don't really see this as a big deal. It's just tit-for-tat lawyering and public posturing.

2008 Aug 11 10:30 AM

[Ishortyou:]

I agree I think there wouldn't be any strategic gain from sueing Ackman, instead I probably would saving that money in building book value by saving all the cash possible forget about share by back or dividends pay outs, because to be upgraded to triple A status takes more capital into consideration, I probably would also sit down and look under the microscope those triple A rated CDO-ABS-MBS to unwind fraudulent loans for book remediation.

2008 Aug 11 11:45 AM

[Tom Armistead:]

I listened to the conference call. In response to a question, Jay Brown said MBIA was reviewing its options as far as suing Ackman, and would consider what was in the best interests of shareholders. As a shareholder, I expect management to protect my interests, and if MBIA has a legal cause of action against Ackman, I expect them to pursue it.

Eric Dinallo, NY State Superintenent of Insurance, wrote an article in the Financial Times warning that spreading rumours of insolvency about NY insurance companies is illegal, and harmful to the public interest. Ackman had no reasonable basis for believing the loss estimates he published - his motivation was to enrich himself by driving up spreads on CDS he held on MBIA.

It is also illegal under Federal Law to make false statements in order to manipulate stock prices. As a shareholder of MBIA, I do not have the resources to pursue a legal action against Ackman. I complained in writing to the SEC and left it at that. But if MBIA sees a valid cause of action, I would expect them to pursue it.

Today Bloomberg publsihed an article highlighting extremely suspicious option activity on Bears Stearns in the days before its demise, together with huge amounts of naked short sales. The inference is that a number of people knew the company was going to be taken down.

There are laws already on the books sufficient to protect the public from stock manipulation. What has been lacking is any meaningful level of enforcement. The harm and danger to the financial system on which we all depend has been serious.

That would really be wonderful, to let a financial meltdown and a Depression get started by looking the other way as a bunch of arrogant, crimainal manipulators bring the system down.

2008 Aug 11 08:51 PM

[neeb??:]

and it won't be because of 'them' but a slow as molasses in january enforcement system. why do these people wait until months after the fact? maybe because it's all perscution complex?

2008 Aug 12 11:47 AM

[notsosmart:]

folks-its all a scam. its vegas,you lose slower & nobody brings a drink.enjoy the gamble.

2008 Aug 12 10:44 PM

[GiveMeABreak:]

I find this opinion to be ridiculous. Ackman knowingly broke a rather clear law for his own personal gain. In doing so, he wrecked havoc across a wide swath of the US financail system. Moreover, he is a repeat offender (see his earlier run-in on the same subject). The idea that neither MBIA nor Eric Dinallo should do anything about it is just silly. That is part of their job. As a start, they might try issuing some supoenas to the sell side, reporters, other shorts etc. That would make for fascinating reading. At the head of the list might be Ackman's flack, Whitney Tilson. The conventional wisdom is that he is rather short on original thought but rather long on parroting Ackman.

2008 Aug 13 09:39 AM

[oldlures1:]

Sorry Felix, but stating that legal action against Ackman is a "...very, very, very bad idea.", particularly for the reasons you've cited, provokes my inclination to label you naive, if not a schmuck of sorts.

True, Ackman may be able to rangle himself out of this potential jam by slipping through some legal loopholes, but his actions, as well as those of his cronies, should land him behind bars or, at a minimum, result in some very hefty, very punitive fines. That guy is bad news; bad with a capital "B".

I said many months ago on SA that Ackman and his posse deserve some time in Club Fed, and I stand by my original contention.

2008 Aug 15 01:38 PM