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Todd Sullivan
Todd Sullivan

More on Bond Insurers MBIA (MBI), Ambac (ABK) - Update

June 18, 2008 | About:

Hedge Fund Manager Jay Brown of Second Curve Capital, has recently taken a long position in MBIA’s stock. He recently responded to an email sent by Whitney Tilson.

In looking at this lately, it seems like the Bear argument against the stocks has gone from a strict dissertation of fact to a bit of yelling fire in a crowded theater. Even Ackman has been extremely quiet lately about the subject preferring to talk more about short selling in general vs. just about the insurers. Perhaps this is because he has drastically cut back or totally eliminated his short position in both.

In the post, Brown says:

"Next, Whitney slams the company for changing its plans for the $900 million. He argues the company once said it would downstream the cash, and is outraged it has had a change of heart without (until now) informing investors, customers, the rating agencies, and regulators. He then suggests the company’s actions might constitute fraud and market manipulation.

Say what? That’s as harsh as it is inaccurate. Here are the facts. Management only expressed an intention to downstream the $900 million, and didn’t do so right away so it could receive more clarity on future actions by the rating agencies. The New York State Insurance Commissioner was certainly involved in the discussion of where the money would go, since one of the company’s options under review was (and still is) the possibility of downstreaming the $900 million into a new subsidiary to write new business. So this is not fraud and market manipulation. It’s simple, above-board capital allocation.

Whitney goes on to claim MBIA has denied policyholders money that’s been promised to them so that management can keep their jobs. Policyholders are thus “screwed.” He then ends his tirade with a nice piece of thundering self-righteousness:

MBIA seems to have forgotten that they're a regulated entity and that they're not allowed to balance their "obligations to policyholders with optimizing returns to our shareholders". The deal with any insurance company is that policyholders come first and only if there's money left over does anything go to the holding company, which is why MBIA is [likely to fall further] and why we're still short it.

The good news is that, based on what I've read, NY State Insurance Commissioner Eric Dinallo is on to these guys and I assume won't allow these . . . actions.

Whoa! Can we get back to Insurance 101 for a second? Whitney surely understands the difference between a holding company and an insurance subsidiary. Dinallo regulates the insurance sub; he has no jurisdiction over the holding company. What’s more—and I’m sure Whitney understands this, as well--Jay Brown and the other members of MBIA’s board of directors have a fiduciary obligation to their shareholders. It is very, very simple. "

He then finishes with:

"If the rating agencies don’t rate MBIA’s insurance sub AAA, then the insurance subsidiary (which was overcapitalized even when it was rated triple-A, recall) is extremely overcapitalized at its new rating. The last thing the board should be thinking about, therefore, is sending the unit another $900 million. Especially since, with the company writing little new business, its risk exposure is declining.

Don’t forget, MBIA already exceeded S&P’s stated minimum capital requirements for a triple-A rating by $900 million at the end of the first quarter, and exceeded Moody’s minimum by $2.8 billion.

Despite what vocal shorts like Whitney Tilson have to say, neither MBIA or Ambac have capital or liquidity shortfalls. Interestingly, in eviscerating Jay Brown’s letter to his shareholders this week, Whitney let the following comment stand: “we continue to feel comfortable with our economic loss estimates embodied in the reserve and impairment figures we provided to the market in our last earnings call.”

So the company is manifestly well-capitalized, and continues to be comfortable with its loss estimates.

Whitney, maybe, just maybe, the outlook for MBIA isn’t nearly as bleak as you insist. It might pay to take a harder look! "

Now, I am a fan of Whitney and readers here have known for some time that I am as I regularly post his appearances in and his writing on a variety of subjects. That being said, I think the short story for both monolines is done. The only thing left is insolvency which, NYC Insurance Commissioner Dinallo will not allow. If that is true, then the only way the shorts can influence prices is too scare people more.

I think Whitney may be running the risk of looking a bit like a fear monger on this one....

About the author:

Todd Sullivan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 4.0/5 (12 votes)


Armeetofo - 9 years ago    Report SPAM
Ustaad - 9 years ago    Report SPAM
Surely, you mean Tom Brown of second curve capital.
John.sturges - 9 years ago    Report SPAM
Tom has been making the counter argument and backing it up with decent analysis. The shorts have had a valid argument for a while because of the excesses and sloppiness in many financials, but they have very likely gone too far. My only caveat is that going forward why would any municipality now buy insurance to boost ratings now that we have all been educated that even a BBB muni is better than a AAA corp. The insurers business model "has no clothes" and I would not buy insurers, but I would look at financials where I understood the management, i.e. JPM, PGR, AINV-definately not AIG till some one acceptable to outside shareholders arrives.

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