oldlures1

MBIA: Moody's Twists the Knife

User148443 - welcome to the party! You're coming into this game at an interesting juncture. Personally, I'm heavily vested in MBI, so I'm going to ride this pony 'til it bucks me off. That said, I'd be remiss if I didn't advise you to wait on the sidelines. My confidence is getting rattled these days, not because I doubt the companies' numbers, but because there are forces at work here that are less obvious and very unpredictable. The companies' financial fundamentals are sound; they exceed the rating agencies capital requirements and can pay policyholders under worst-case scenarios. So why are they being downgraded, you ask? Good question. Frankly, they shouldn't be. But this all has evolved into a classic example of (false) perception becoming reality.

It all began when activist hedge fund managers, like Ackman, shorted the monolines. They then intentionally launched highly visible, well-executed propaganda campaigns to trash the companies. Like the rats led by the Pied Piper of Hamlin, the market soon began to buy into the propoganda. Ackman and other were successful in creating a "perception" (albeit a false one) that began to manifest itself into a "reality". The stock price dropped, and Ackman (and fellow manipulators) made a bundle on their short positions. As expected, the companies' reputations fell under fire, and they soon found it hard (although not impossible) to write new business. Yes, they were still writing business, but much less than before. The rating agencies, which had maintained the companies' AAA-ratings, soon fell under scrutiny from the market place. The mkt couldn't understand why its "reality" wasn't that of the rating agencies, as such it deduced the rating agencies were inept. Feeling the pressure, the rating agencies downgraded the monolines, but lacked substantive supporting evidence, so they quoted such things as "financial flexibility" and "franchise value" as reasons for their actions. In other words, they questioned the monolines ability to write new biz. But remember, they were, in fact, still writing business...albeit much less. Given enough time, the Pied Piper-induced "reality" would have, in time, dissipated like an oceanic fog on a sunny day, and the monolines could have henceforth resumed business-as-usual. However, by downgrading the monolines, the rating agencies effectively shut the monolines' doors; they can't write biz without the "AAA". Ironic, isn't it? And so now you find MBI and ABK trying to open new entities via pre-existing subsidiaries. The subsidiaries can be rated "AAA"; they don't need the holding co's rating.

Sure, you'll hear a lot of rhetoric about how monolines are toast. But ask yourself this, if that were the case; if the whole industry was doomed, why did Buffett just enter the market via his newly created monoline, Berkshire Hathaway Assurance (who, by the way, owns 20% of Moodys rating service -- interesting huh?).

Meanwhile, Ackman and is others activist hedgies keep blowing away on their magical flutes, and the market rats follow mindlessly. Ackman is now "out" of his positions on MBI and ABK, so he's trained his sight on FSA, a AAA-rated (for now!) monoline.

I truly hope MBI and ABK survive this. Sure, they made mistakes, and should take their blows accordingly. But their mistakes are not (and should not be) dibilitating. They're good companies, with sound fundamentals and strong leadership, that should be allowed to survive on their own merits and not be destroyed by the selfless, self-centered antics of activist hedge funds.