Thursday, January 10, 2008 11 comments ++[ CLICK TO COMMENT ]++

Motley Fool Monoline Summary: Bill Ackman vs Martin Whitman


UPDATE: I added at the bottom a quick recap of Bill Ackman's lengthy interview with Bloomberg. He is sticking to his superbearish views.

The Motley Fool has a story on the situation shaping up in the monoline world. A boxing match--geek in me says a chess match analogy is more appropriate, given the slowly unfolding situation--between Bill Ackman and Martin Whitman.

Nothing new for anyone who has been following the situation but it does summarize some events for those not following the bond insurance crisis. I'm just a newbie but this is probably one of the few times I have seen two big-name value investors go up against each other. You see people shorting against Buffett (eg. USG, WMT, etc) but nothing like a strong short position that Ackman has here. Supposedly he is short via credit default swaps so it will probably be difficult for him to unwind that (given the illiquidity in that market given his supposedly large position). I'm just a newbie but I suspect that he has to hold until MBIA or Ambac goes bankrupt before he realizes a sizeable profit. This is just speculation on my part since I'm not familiar with CDS.


Bill Ackman Bloomberg Interview

Bill Ackman gave a 9 minute interview to Bloomberg where he mostly discusses the bond insurers. The printed article is here (you can access the video by clicking on the link at the top right of the article).

He is basically sticking to his guns and is more convinced than ever that nearly all the bond insurers, but MBIA in particular, is going bankrupt. He said he has been adding to the short position, both stock and CDS, over the last few weeks. Anyone interested in the bond insurers should listen to his full interview for the superbearish case. Here are the key points he made:


  1. According to Ackman, MBIA needs to raise $10 billion in capital. He does note that it doesn't have to happen right away but that's what he is expecting. I would say that the market is expecting around $3 billion in losses, while the company is raising around $2 billion.
  2. He thinks most of the bond insurers (MBIA, Ambac, FGIC, XL Capital, SCA) may go bankrupt.
  3. He thinks some of the monoline reinsurers are going to go bankrupt. He thinks some of them may be already insolvent.
  4. He thinks that the insurance regulators will crack down on the insurance subsidiaries and won't let them remit money back to the holding companies.
  5. He thinks the notes that MBIA is trying to issue will end up paying zero interest because the insurance regulators won't let the insurance subsidaries pay out anything to the holding company until the regulators think the policyholders are fully protected. According to this AP article, the notes will be rated AA and yield 12% to 15%. I don't know much about debt instruments but how is it normal to have a AA-rated debt pay such a high interest? Ackman thinks this 15% yield won't be paid but that makes no sense to me. I highly doubt that MBIA will consider a debt structure where they are liable to pay out interest and actually won't.
  6. Ackman thinks that the rating agencies will come out with worse opinions of the bond insurers because their models don't account for the potential loss of new business due to Berkshire Hathaway Assurance. I personally don't put much weight into this argument because Berkshire Hathaway Assurance is very small right now, isn't licensed in all states, and has categorically said that it is mostly interested in charging high premiums for stronger guarantee.


Ackman has some good points but, fortunately for my side, there are a lot of ÌFs and BUTs in his argument. My impression is that a lot of his thoughts are based on housing deteriorating much further--much worse than the general bearish consensus--and we just don`t know what will happen. For example, he says that HELOCs (home equity loans) will go to zero but that is totally dependent on the economic situation.

One point that he raised, which I never considered before, is the fact that the government may start fiddling with the bond insurers to their detriment (Ackman should know given that his fund was probed by the government before). Generally arriving well after-the-fact, government agencies have a habit of making life difficult for business. If the government regulators prevent the insurance subsidiaries from remitting some money back to the holding companies, it can be ominous for the bond insurers. The holding companies have no other business so if the subsidiaries don`t pay anything to them, they will face a cash shortage.


MBIA`s note placement is extremely important to Ambac. Not only will it provide a bullish thrust, it also gives a good indication of market demands for capital infusions.


To add a new person to the mix, Whitney Tilson, a value investor, has joined Ackman's side and is short MBIA and Ambac as well. Doesn't look good for my side but who said making money was easy? ... But Martin Whitman is still adding to his MBIA stake.

I don`t think I`m exaggerating when I say it feels like a chess match of death. Someone is going to win big and... someone is going to lose big!!!

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11 Response to Motley Fool Monoline Summary: Bill Ackman vs Martin Whitman

cak
January 10, 2008 at 6:14 PM

You've probably seen that Whitman bumped up his stake in MBI from 8% to
11 percent.

Most likely averaging down. That's a pretty big play.

cak
January 10, 2008 at 11:50 PM

The stock hit 11.25 yesterday. At what point do you just say enough is enough and walk away? He could have bought Apple at 170 and sold it at 182 as a day trade, and made the last 12 bucks he's trying to squeeze out of MBI.

What's incredible is the short position in MBI..35% of float,or higher. I'm astonished that Ackman/Tilson can even borrow the the shares. If Whitman asked for his stake in cert form the naked short interest would blow through the roof.

Remember, Ackman placed a huge bet on Target and his Pershing fund suffered a 30% hit in December because of it. At a lowly 12$ MBI has become and emotional issue. And we all know what emotions can do to our investments.

January 11, 2008 at 11:00 AM

Just hold in there CAK. I know MBIA is probably one of the toughest investments of your life for both of you, CAK and NEANDERTHAL, but the game isn't over until it is. MBIA is actually up 10%+ as I speak on a weak day in the markets so we'll see if it can hold here. It looks like it will successfully place their note, although at 15% it is expensive no doubt.

The suspense is increasing on the Ambac front. They have been quiet and it remains to be seen what they can pull off.


As for Ackman, it's clear that he sticks to his guns if he feels confident. Most of his position is likely in CDS, rather than stock, so he won't have liquidity problems. I think he will stick with his position until something makes him change his mind. We basically need to see the housing market deterioration slow down. The way I'm looking at it, if the monolines can maintain enough capital by Fall of 2008, it's mostly clear skies after that.

Whitney Tilson is someone I respect so it's tough to be going up against him. I have read numerous of his articles and been influenced by them so it's weird to take a position against him. I don't see value investors shorting much (they mostly play the long side, except in workouts and arbitrages) so it's interesting to see Ackman and Tilson take short positions...

January 11, 2008 at 11:02 AM

For what it's worth, snow fell in Baghdad for the first time in memory...

Hope it's a good omen for us :)

cak
January 11, 2008 at 12:00 PM

Thanks.I was having a Rolaids moment.

cak
January 11, 2008 at 12:38 PM

Bloomberg 12/14

Tilson

January 11, 2008 at 1:22 PM

The stock price of these bond insurers literally means nothing anymore. They don't provide any pricing signals anymore (it's arguable they ever did). There must be some crazy short covering in MBIA. The stock is on a diagonal ascent!

One thing to note is that Ambac's preferred shares (AKT, AKF) have been holding up well in the last few months even with the threat of a $1 billion dilution.

I just hope Ambac, and MBIA, offer callable bonds (or mandatory convertibles). If they get through this crisis, which I think they will, we need to get rid of these expensive bond-like instruments in 5 to 10 years. Supposedly one of the sticking points with the MBIA note offering is the possibility of a call feature.

Crazy day... most the market, including oil, is down.. but gold is up and the monolines are on fire...

cak
January 11, 2008 at 1:35 PM

The deal was priced at 14%. Oversubscribed at 1.3 billion with Marty Whitman buying some.

Haven't seen the details on call feature.

MBI also bumped up CDO2 exposure from 8.1 to 9 billion.

So they got the cash, which helps, despite a yield that I was hoping was nearer the low end.

January 11, 2008 at 2:13 PM

Some word on the call feature in this article:

" Pricing on the issue, initially expected this week, is uncertain, said another investor, who declined to be named. Delayed pricing may be due to negotiations over protections demanded by some large investors against a five-year call feature, he said."

Neanderthal
January 11, 2008 at 3:00 PM

I used to own tilson focus as part of my portfolio. Have since sold it, so I follow Whitney Tilson for a while. My sense about him is that he talks a good game, when it comes right down to doing the analysis and such, I would pick Bruce Berkowitz at Fairholme anyday. Marty Whitman is another guy that I trust because he does much more detail analysis.

It was his uninspiring record that lead to me dumping the fund, but it seems that he like to spend his time doing many things besides investing. I would not worry about Whitney Tilson shorting MBI.

John

cak
January 11, 2008 at 4:07 PM

NEW YORK, Jan 11 (Reuters) - MBIA Insurance Corp., a unit of MBIA Inc, (MBI.N: Quote, Profile, Research) on Friday sold $1 billion in surplus notes via joint lead managers JP Morgan, Lehman Brothers and Morgan Stanley, said a market source familiar with the sale.

The notes will mature on Jan. 15, 2033 and were priced at par to yield 14 percent.

The notes are fixed until 2013 and if they are not called then they float at +1.126 basis points over the three-month London Interbank offered rate. (Reporting by Caryn Trokie)

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