Bill Ackman's Super-Bearish Presentation on Bond Insurers

Thanks to Rational Angle for providing the link to Bill Ackman's presentation on bond insurers at the Value Investing Congress. I have been looking for this and didn't realize it was posted at the official site of the forum.

The presentation pretty much covers nearly all the bearish items to be made regarding the bond insurance industry. The presentation raises some interesting points that I didn't pay attention to (such as whether the reinsurance companies themselves will be able to pay out losses if there is a blowup). I didn't read it fully yet and may post my views if I want to rebut anything.

I find some elements of the presentation to be superficial. For instance, the title is pretty much doublespeak. The presentation is titled "How to Save the Bond Insurers" when in fact Pershing Square is short the bond insurers and pretty much offers suggestions to bankrupt the bond insurance holding companies. This is no different than people who are short homebuilders or mortgage lenders offering suggestions to "fix" the housing mess.

One of the bizarre arguments from the bears in my eyes--who is mildly bullish on the bond insurers although I have no position--is the notion that this industry is not viable. I'm not sure how anyone can make that argument when companies like MBIA and Ambac have been in the same business since the early 70's. One can argue that structured products are not viable, or that some of these companies made tragic business-ending moves, or whatever, but I don't get the 'industry not viable' argument.

I also see a flaw in people arguing that bond insurers are heavily leveraged or only make money off a few basis points. All that is true but it doesn't mean that an industry can't exist. I am just a newbie and don't really understand everything but isn't the catastrophic insurance business the same thing? Or how about reinsurance, with the big companies like Swiss Re, Munich Re, Berkshire Hathaway, and so on? A lot of the catastrophic reinsurance companies also have very low capital compared to the massive damage that they have to pay out (I know because I own Montpelier Re (MRH), which got hurricaned ;) and nearly went bankrupt after Katrina--of course, being a contrarian I bought it after its crisis).

Insuring high par value isn't a big deal if the probability of loss is low. That's how these bond insurers were able to stay in business for many decades (municipal bonds don't default often). The real question for anyone looking to invest in the bond insurers is whether their "quest" into structured finance was a bit too adventuresome for these insurance knights. Although the stock prices say something else, the verdict is still out. So far, I am confident that the bond insurers will make money, even on subprime mezzanine CDOs, from 2000-2004 vintages. The 2005 vintage stuff is questionable, and 2006/2007 are likely losses.