What's Going on with Bond Insurers?

|
Includes: AMBC, MBI
by: Steve Bank

I first came to look at investing in the bond insurance debacle when I saw Ambac (ABK) and MBIA (NYSE: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