William Ackman, president of Pershing Square Capital Management, said Wednesday that he believes MBIA Inc. and Ambac Financial Group, the holding companies for the two largest bond insurers, could fail as early as next year. "We're short the holding companies because we think they'll run out of cash and go bankrupt," he said succinctly. Ackman forecasts that MBIA will incur $2.2 billion and Ambac $4.2 billion of losses in Q4. Their exposure to subprime products is similar to that of Merrill Lynch and Citigroup, he said, but they have relatively little capital, so a few bond defaults could be catastrophic. Bond insurer shares have been in freefall on fears that the disintegrating credit ratings of subprime mortgage assets could force them to take big writedowns. "We stand by the internal ratings of our book of business, which are almost 100% investment grade," said Ambac spokesman Peter Poillon. "We strongly disagree with Mr. Ackman's statement that the company will be insolvent in the second quarter of 2008," said Jeff Lloyd, a spokesman for MBIA. "He made similar statements in 2002, none of which have come true." If MBIA and Ambac do fail, Pershing stands to make "multiple billions of dollars," Ackman said. He will reap a personal windfall on the order of $500 million that he said he will donate to the Pershing Square Foundation. "The hedge fund business is profitable. I've made more than I need," Ackman said. "I also think it's the right thing to do."
Commentary: Taking a Closer Look at Ambac's CDO Loss Projection • Ambac Needs Capital Infusion to Keep Its AAA Rating • MBIA, Ambac and Pandora's Box
Stocks to watch: MBI, ABK
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