Thursday, February 14, 2008 1 comments ++[ CLICK TO COMMENT ]++

Another Weird Day for the Monolines

UPDATE: Just ran across this GaveKal forum post with a good discussion of the monolines and some of the issues that have cropped. I generally respect GaveKal for their off-the-wall thinking.

Well, the day started off with hearings on the state of the bond insurance industry. Most of the prepared testimony made it to the press yesterday so nothing materially significant happened.

Eliot Spitzer started off by saying the monolines should split the municipal bond business and the structured finance products business. What was surprising to me was how he implied that something will happen within a week if the bond insurers can't raise capital on their own. I am not an expert on government regulations but I believe he doesn't have any power to do anything to the insurers. It all comes down to what Eric Dinallo, the New York regulator, does (in the case of Ambac, whose "home" is in Wisconsin, it depends on the Wisconsin regulator as well). The New York regulator seems to suggest something similar to what Spitzer was saying. The unfortunate thing is that some seem to think that the Warren Buffett plan is viable when in fact it is nothing more than looting the good business while the uncertainty over subprime assets remain. Ambac's CEO supposedly called the Buffett offer "virtually laughable".

MBIA rebutted Bill Ackman's open-source model and attacked him, all the while Bill Ackman discloses that he has a million shares worth of put options on Ambac and a little less on MBIA. Bill Ackman is going all out and is likely short the stocks, is long Credit Default Swaps, and now seems to have positions in put options as well. Since he runs a hedge fund that doesn't have to disclose much, we don't know if his position has decreased.

The shares of MBIA and Ambac rallied sharply near the end of the day on news that Moody's downgraded FGIC but mentioned that MBIA and Ambac have strong franchise value. Moody's is still reviewing the big two for a possible downgrade within weeks.

However, the biggest news for me was word that Legg Mason Capital Management took a position in Ambac. LMCM for those not familiar is run by value investor Bill Miller (and others). He hasn't been having a good couple of years but I'm a big fan of Bill Miller so this is very good news in my eyes. The only thing is that they likely bought the stock at a much lower price and the position is small for them so it isn't a big bet for them. SEC filing shows that they own around 7 million shares worth about 7% of the company.

(Useless but interesting statistic for the day: For those keeping score, Zimbabwe's inflation hit 66,216%. )

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1 Response to Another Weird Day for the Monolines

February 14, 2008 at 4:37 PM


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