Monoline Mania: MBIA and Ambac Included in the Dash to Trash

by: Tom Armistead

MBIA (NYSE:MBI) and Ambac (ABK) were up 46% and 17.5% respectively as of Thursday's close, on no news. Options activity was florid: volume on many strikes was equal to or greater than open interest. Share volume on MBI was 25 million, compared to a daily average of 4 million; for Ambac, volume was 112 million as against 17 million. The mono-lines have been included in what the Fast Money crowd on CNBC has been calling the “dash to trash,” which began earlier this week, featuring Fannie Mae (FNM), Freddie Mac (FRE) and AIG.

Possible explanations

Sitting in my home office in Connecticut, gathering information from press releases, financial statements, or other public information, I am at a disadvantage to the denizens of Wall Street, the fast and smart money players who no doubt are hearing all sorts of rumors from quicksilver messengers of various types, such as emails, text messages, phone calls and even twittering.

I checked my calendar: We are nowhere near a full moon.

Several days ago I had a phone call from a reporter who wondered if anything had been done about TARP for the financial guarantors - the insurance (or reinsurance) provision introduced into the legislation by Rep Eric Cantor, (R-VA). I told him what I knew and suggested he contact Eric Dinallo, former Insurance Commissioner for the State of New York and extremely well-versed in the issues involved. Perhaps the reporter thought from the amount of blogging I do on the subject that I might have inside information. No such luck. Treasury is pretty leaky and if there was anything out there Charlie Gasparino would have it by now.

The stocks involved are all hard to borrow, favorites of the short-to-oblivion set. Maybe the SEC is going to take another look at the issues presented by DTCC's CNS system. If they did, they might conclude that this system enables naked short-selling during the day. DTCC has explained that naked short selling is a trading strategy and not an issue they concern themselves with. If a rumor got out that the SEC were going to do something along those lines, obviously anyone who was naked short would want to cover.

Recent improvements in the housing market, such as the increase in home prices reported by the Case Shiller index and improved sales of existing homes reported by NAR, may have caused a panic among those who are short shares of the most affected players. The ABX-HE indexes are up for the past several days, but nothing too exciting. I regarded the information as favorable for the mono-lines, since it may spell an eventual end to the hemorrhage on structured finance involving sub-prime RMBS, HELOCs, CES etc. However, it still looks like the bleeding will go on for at least another 6 months.

I still think the moon has something to do with it.


My only remaining involvement with the companies affected is an options position in MBIA, covered calls I sold at the September 6 strike in order to fund four times as many September 7 calls: long 2,000 MBI, short 20 MBI Sep09 6 calls, long 80 MBI Sep09 7 calls. I have a quick profit; the decision is whether to take the money and run or to hang in and hope for further upside.

Readers know that I have been keeping an eye on MBI's non-GAAP adjusted book value, currently standing at 40.01 with the shares at 6.87 in after hours. The thinking is, the potential upside -- if MBI's management is correct on loss reserves and able to prevail on pending litigation- is very large and not reflected in options pricing. Hence, the attraction of a low-cost position that responds well to a large upward movement.

So, this is about being covered for the big one. I will hang onto the September 7 calls unless or until the stock makes a huge upward move. On the covered calls, if the time value on the calls gets low enough, heading toward expiration, I will plan to lock in my profit on that part of the position.

Disclosure – net long MBI as described in the article, no position in the other companies mentioned.