William Ackman Placing Bets Against FSA

UPDATE: The monoline saga continues... added a bunch of links near the bottom dealing with the criticism and rebuttals of the New York Times story from yesterday. Personally I think the story is decent except for the fact that they presume that the regulator would take over MBIA any minute now and are not doing that because of the CDS insurance contracts.

William Ackman, speaking at a Jones Day conference, says that Financial Security Assurance (FSA), a monoline, is going to go bankrupt as well. William Ackman has purchased CDS on FSA's bonds.

Hedge fund manager Bill Ackman, who correctly predicted shares of MBIA Inc. and Ambac Financial Group Inc. would tumble, said he now is betting against Financial Security Assurance Holdings Ltd.

Financial Security may be insolvent because it sold investment contracts backed by mortgage securities that have tumbled in value, Ackman, 42, told a conference hosted by law firm Jones Day yesterday in New York. Financial Security, a New York unit of Brussels and Paris-based Dexia SA is one of two bond insurers to retain their AAA credit ratings after rivals were roiled by losses from collateralized debt obligations.

``The market has not woken up to FSA,'' said Ackman, who runs the $6 billion Pershing Square Capital Management hedge fund. Ackman says he will make hundreds of millions of dollars if MBIA and Ambac go bankrupt. ``FSA is AAA stable, just don't look too close.''

FSA is owned by the French bank Dexia and is one of the monolines that has managed to maintained an AAA rating through this turmoil.

Financial Security offers investment contracts with a return guaranteed by its insurance unit to municipalities and other investors looking to park the proceeds of bond issues. The value of some of the securities backing those contracts has tumbled so much that the company's liabilities of $20.4 billion exceed its assets of $16.2 billion, Ackman said.

MBIA and Ambac also have similar operations if I'm not mistaken. However, it's not clear how big of an issue this is. I think it will come down to the final value of the assets upon maturity so it may not matter much unless the invested money actually results in losses. William Ackman may be right in some things but I still think he ignores the fact that credit instruments held to maturity are a different beast. For example, if FSA invested the money in, say, a 10 year US Treasury then the value of the investment could decline but as long as there is no default, the asset will be equal to par value upon maturity. The only risk in these investment agreements is if there is some trigger that requires collateral to be posted or if assets to be given back based on asset value declines.

In any case, a 20% decline seems quite steep and I hope the investment professionals didn't invest in some risky stuff (same applies to Ambac and others).

In January, Ackman estimated MBIA and New York-based Ambac faced losses on home-loan securities of almost $12 billion each, a claim the companies disputed as recently as February.

The market is pricing in similar losses as you can tell by looking at the share price. I'm curious to know if he revised his estimates upwards for MBIA and Ambac.

XL, FGIC and CIFG may already be insolvent, Ackman said...

MBIA and Ambac risk becoming insolvent by eroding their statutory capital if they continue to set aside loss reserves at their recent pace, Ackman said. Under an alternative New York State Insurance Department test of solvency, which requires a company to be able to buy reinsurance for its guarantees using its assets, the companies already are insolvent, Ackman said.

Because MBIA has a surplus of $3.9 billion, insolvency is ``both highly theoretical and extremely unlikely,'' Kevin Brown, a spokesman for MBIA said in an e-mailed statement before Ackman spoke.

``There's not likely to be a man left standing'' in the bond insurance industry, Ackman said. ``This thing is over already, the market just doesn't know it yet.''

We shall see... I wonder if he thinks Assured Guaranty will also collapse.



More on the NYT Story...

With respect to the NYT story from yesterday, there are a lot of stories and opinions floating around but here are some opinions from the blogging world:

Yves Smith of NakedCapitalism.com, no fan of the monolines, does not like the fact that MBIA is holding onto capital it raised from its shareholders. She seems quite angry that MBIA is somehow holding its ground and may have some leverage against the government. (Nakedcapitalism.com is actually a good blog and people should check it out. It provides uncommon views that are pro-state and attack Wall Street firms (in contrast, most business publications don't take a harsh view of businesses.))

What started off the current round of discussion was MBIA attacking the story. MBIA avoids one of the key issues (what happens to CDS contracts if company insolvent) but does tackle the misleading points mentioned in the article, including the assumption that the company is almost about to be taken over and the CDS contract is what is blocking that, and the misunderstanding by some that believe that MBIA has to downstream the capital that was raised.



Felix Salmon of portfolio.com leans more towards the MBIA rebuttal.

FT Alphaville, a good daily market blog BTW, takes issue with MBIA's response. FT Alphaville thinks MBIA is obfuscating some of the issues (I agree to some degree) but does provide a balanced view.

Yves Smith seems to think that MBIA is lying in its response to the original article.


FT Alphaville provides further opinion on the NYT story and MBIA rebuttal.


Felix Salmon rounds out the situation in his portfolio.com blog entry.


Oh, for those confused, here is the original NYT story. Pretty innocuous story but any implication that someone is standing up to a government regulator brings out the emotions.