Monday, December 3, 2007 3 comments ++[ CLICK TO COMMENT ]++

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.

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3 Response to Bill Ackman's Super-Bearish Presentation on Bond Insurers

neanderthal
December 4, 2007 at 1:48 PM

One of the points raised by Bill was the risk of the reinsured default risk by the reinsurance company going bankrupt. I wonder how much of ABK's portfolio has been reinsured and by whom.

John

neanderthal
December 4, 2007 at 6:41 PM

For what is worth, I checked the latest updated on Guru focus, RS value fund has dropped abk. The good news is that Marty Whitman still owns it as of 9/30. In addition, a couple of people like Arnold schneider and third avenue are continueing to add to mbi. Hopefully someone with premium membership to gurufocus would be able to learn more about the most up to date info about this.

John

December 4, 2007 at 10:05 PM

I am really curious to see what Martin Whitman says in his sharehodler report (likely won't be out until January :( ). I don't know if I can wait that long but since he focuses heavily on SAFETY and combs through the balance sheet (as opposed to most investors who primarily look at the income statement), I really wonder what he thinks. Is this whole sector (he owns MBIA, Radian, and Ambak) a gross miscaluation? Remains to be seen...

check my new blog entry I'm going to make about Ambac's reinsurance...

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