It has been widely known that Investment Guru Martin Whitman has invested heavily in common stocks of Mortgage Insurers such as Radian Group, Inc. (RDN) and MGIC Investment Corp. (MTG), and common stocks of bond insurers such as MBIA, Inc. (MBI), and Ambac Financial Group, Inc. (ABK). Besides, He has bought into MBIA Insurance Corp. 14% Supplus Notes,, a bond that carries a 14% coupon rate and matures on 1/15/2033. As of January 31, 2009, Martin Whitman owns 10.65 millions of RDN shares, two millions of MTG share, 19.35 millions of MBIA shares, and 25.70 millions of ABK shares. Also, he owns 360 million dollars (coupon value) of MBIA Insurance Corp. 14% Surplus Notes.
Based on Data from GuruFocus and Martin Whitman’s Third Avenue Value Fund (TAVF) quarterly report, we summarize the trading history and ending balance in these investment instruments:
1. Common Stocks
On August 29, 2009, GuruFocus published a progress report on these investments. In the report that Martin Whitman’s cost for RDN was about $28 per share, $23 for MBI and $5.5 for ABK. Based on GuruFocus Data, we can also estimate his cost for MTG shares is about $26 per share. At that time, stock prices of these companies just had a nice rebounce and Ambac shares was actually showing a nice profit at the price of $7 per share. The other three stocks were still under water.
Of course, sea changes have happened since later August of 2008. The stock prices for the four stocks have declined dramatically since then. Martin Whitman has lost more than $400 million in the four stocks from August 29, 2008 to April 9, 2009. The following table summarizes the damages that have been done to the stocks:
Martin Whitman reported that he sold a stake in MBIA (4.3 million shares) and Ambac (two million shares) at losses in the fiscal quarter ended on October 31, 2008. (In making this table above, we assumed that Martin Whitman sold the shares between July 31 and August 29, 2008. Losses could be higher if he did not). As he stated in the October 31, 2008 Quarterly Letter, the reason for the sale was:
In other words, MBI and ABK shares were sold to meet redemption requests and to create capital losses so that he could offset the capital gains from sales of other investments. Despite the sale, Martin Whitman stood by the investment value of these two stocks, in the same Quarterly Letter, he went on and commented:
In other words, MBIA and Ambac became cheaper because of the market sentiments, however, fundamentally, they were still “Safe”.
If one calculates the losses based on his purchase prices, the losses will be even more substantial. So clearly, up to now, Martin Whitman’s investing into these four stocks has been far from satisfactory.
2. MBIA Insurance Corp. 14% Surplus Notes
It worth pointing out that aside from the sale discussed above, Martin Whitman acquired additional MBIA Insurance Corp. 14% Surplus Notes: 21 million dollars in the quarter ended on October 31, 2008 and 5 million dollars in the quarter ended on January 31, 2009, bringing the total to 360 million dollars (all bond purchases are listed at coupon value, exact prices paid are unknown). These bonds apparently were bought on there own investment merits, also in case MBIA Inc. goes bankrupt, the bonds entitle Martin Whitman to a stake in the future re-organized company. Martin Whitman rationalized his action on acquiring these bonds in the January 31, 2009 Quarterly Letter:
Very well said, but only if the world evolves according to the plan!
In February 2009, MBIA announced to it will split its municipal bond insurance business from the mortgage- related debt guarantees business. The later led to the loss of its top credit ratings. The motivation behind the move is to create a “good bond insurer” and “bad bond insurer”. Good assets, including the guarantees on about $537 billion of municipal bonds will be transferred to the future “good bond insurer” - MBIA Insurance Corp. of Illinois, which will be renamed as “National Public Finance Guarantee Corp.”, from MBIA Insurance Corporation, the subsidiary that issued the 14% Surplus Notes.
The move is aimed to regain top rating from the rating agency and reactivate MBIA’s bond insurance business, which has essentially been in run-off. It should be potentially beneficial for the shareholders of MBIA, Inc. by adding future profitable new business to the overall company.
In despite of the 19.35 million shares (more shares if you include the shares held by other Third Avenue Funds) of MBIA common stocks that he holds, Martin Whitman took issues of the separation. On April 7, 2009, Third Avenue Management LLC took MBIA Inc to court and filed a lawsuit to block the split. Reader can click here to read the full story in Bloomberg.
In a sense, the lawsuit is the Martin Whitman the bondholder of MBIA Insurance Corp. suing Martin Whitman the shareholder of MBIA Inc. Which side will prevail? We will report to you in the future. (To be continued…)
Based on Data from GuruFocus and Martin Whitman’s Third Avenue Value Fund (TAVF) quarterly report, we summarize the trading history and ending balance in these investment instruments:
| Trading Activities | Ending Balance | ||||||||
| Quarter End | Jul-07 | Oct-07 | Jan-08 | Apr-08 | Jul-08 | Oct-08 | Jan-09 | Jan-09 | |
| Common Shares (Millions of Shares) | |||||||||
| Radian Group, Inc. (RDN) | 0.91 | 7.82 | 0.29 | 10.65 | |||||
| MGIC Investment Corp. (MGIC) | 1.00 | 1.00 | 2.00 | ||||||
| MBIA, Inc. (MBI) | 2.00 | 1.60 | 5.46 | 10.61 | 0.50 | (4.30) | 19.35 | ||
| Ambac Financial Group, Inc. (ABK) | 2.00 | 7.41 | 18.00 | (2.00) | 25.70 | ||||
| Corprate Bonds (Millions of Dollars) | |||||||||
| MBIA Insurance Corp. 14% Supplus Notes | 197 | 138 | 21 | 5.00 | 360.00 | ||||
1. Common Stocks
On August 29, 2009, GuruFocus published a progress report on these investments. In the report that Martin Whitman’s cost for RDN was about $28 per share, $23 for MBI and $5.5 for ABK. Based on GuruFocus Data, we can also estimate his cost for MTG shares is about $26 per share. At that time, stock prices of these companies just had a nice rebounce and Ambac shares was actually showing a nice profit at the price of $7 per share. The other three stocks were still under water.
Of course, sea changes have happened since later August of 2008. The stock prices for the four stocks have declined dramatically since then. Martin Whitman has lost more than $400 million in the four stocks from August 29, 2008 to April 9, 2009. The following table summarizes the damages that have been done to the stocks:
| Shares | Closing Price | Gain(Loss) | |||
| Symbol | (Million) | 8/29/2008 | 4/9/2008 | Change | (M $) |
| RDN | 10.65 | 3.83 | 2.32 | -39% | (16) |
| MTG | 2.00 | 8.41 | 2.1 | -75% | (13) |
| MBI | 19.35 | 16.22 | 5.03 | -69% | (217) |
| ABK | 25.70 | 7.07 | 0.97 | -86% | (157) |
| Total | (402) | ||||
Martin Whitman reported that he sold a stake in MBIA (4.3 million shares) and Ambac (two million shares) at losses in the fiscal quarter ended on October 31, 2008. (In making this table above, we assumed that Martin Whitman sold the shares between July 31 and August 29, 2008. Losses could be higher if he did not). As he stated in the October 31, 2008 Quarterly Letter, the reason for the sale was:
Securities sold to meet redemptions were non-core holdings. Admittedly, none of the issues would have been sold were it not necessary to maintain liquidity. Sales of high cost holdings of Ambac Common, MBIA Common and St. Joe Common resulted in capital losses which were available to offset earlier capital gains.
In other words, MBI and ABK shares were sold to meet redemption requests and to create capital losses so that he could offset the capital gains from sales of other investments. Despite the sale, Martin Whitman stood by the investment value of these two stocks, in the same Quarterly Letter, he went on and commented:
A major problem with our “Safe and Cheap” investing philosophy is that “Safe and Cheap” securities tend to become cheaper when the near-term results and/or outlook are poor. This is currently the case for the distressed portion of the portfolio (MBIA Common; Ambac Common; GMAC Senior Unsecureds; MBIA Surplus Notes; and Forest City Senior Unsecureds).
In other words, MBIA and Ambac became cheaper because of the market sentiments, however, fundamentally, they were still “Safe”.
If one calculates the losses based on his purchase prices, the losses will be even more substantial. So clearly, up to now, Martin Whitman’s investing into these four stocks has been far from satisfactory.
2. MBIA Insurance Corp. 14% Surplus Notes
It worth pointing out that aside from the sale discussed above, Martin Whitman acquired additional MBIA Insurance Corp. 14% Surplus Notes: 21 million dollars in the quarter ended on October 31, 2008 and 5 million dollars in the quarter ended on January 31, 2009, bringing the total to 360 million dollars (all bond purchases are listed at coupon value, exact prices paid are unknown). These bonds apparently were bought on there own investment merits, also in case MBIA Inc. goes bankrupt, the bonds entitle Martin Whitman to a stake in the future re-organized company. Martin Whitman rationalized his action on acquiring these bonds in the January 31, 2009 Quarterly Letter:
The Forest City Seniors, the GMAC 73â„4%s, and the MBIA Surplus Notes were acquired at yields to maturity of 26% or better. These are far higher yields for performing loans than anything we remember in our careers, which stretch back to 1950. Analysis suggests strongly that all three loans are likely to remain performing loans over their lives, or in MBIA’s case, until call in January 2013. The probability of them remaining performing loans seems to be on the order of 70% to 80%. However, if MBIA must undergo a reorganization or rehabilitation, Fund Management estimates that little or no loss will be suffered by holding these credit instruments. Assuming that the loans stay performing loans, little, or no, attention need be paid to market prices. Held to maturity, or call, the return on the investments will be approximately 26%, or better. One drawback that ought to be noted about these distress debt investments is that for U.S. tax purposes, income, including interest and all or a portion of any realized gains, is likely to be taxable as ordinary income, as opposed to capital gain..
Very well said, but only if the world evolves according to the plan!
In February 2009, MBIA announced to it will split its municipal bond insurance business from the mortgage- related debt guarantees business. The later led to the loss of its top credit ratings. The motivation behind the move is to create a “good bond insurer” and “bad bond insurer”. Good assets, including the guarantees on about $537 billion of municipal bonds will be transferred to the future “good bond insurer” - MBIA Insurance Corp. of Illinois, which will be renamed as “National Public Finance Guarantee Corp.”, from MBIA Insurance Corporation, the subsidiary that issued the 14% Surplus Notes.
The move is aimed to regain top rating from the rating agency and reactivate MBIA’s bond insurance business, which has essentially been in run-off. It should be potentially beneficial for the shareholders of MBIA, Inc. by adding future profitable new business to the overall company.
In despite of the 19.35 million shares (more shares if you include the shares held by other Third Avenue Funds) of MBIA common stocks that he holds, Martin Whitman took issues of the separation. On April 7, 2009, Third Avenue Management LLC took MBIA Inc to court and filed a lawsuit to block the split. Reader can click here to read the full story in Bloomberg.
In a sense, the lawsuit is the Martin Whitman the bondholder of MBIA Insurance Corp. suing Martin Whitman the shareholder of MBIA Inc. Which side will prevail? We will report to you in the future. (To be continued…)
