Commentary: MBIA Versus Ackman, and Other Bond Insurance Miscellany
In what's clearly becoming an all-out assault on Bill Ackman's short position and his allegations that the insurer is undercapitalized, after CFO Charles Chaplin earlier questioned Ackman's motives in his testimony on Capitol Hill on Thursday, MBIA later this morning released the text of a letter sent to regulators in response to Ackman's research (called the 'Open Source Model'). Citing "major errors and omissions," MBIA provides a detailed point-by-point rebuttal that some serious sources seem to be taking as a cogent response.
Via the Alea blog, some strong words:
The biggest flaw in Mr Ackman model is that he doesn't appear to know the difference between an â€œinsured credit default swapâ€? and a plain vanilla credit default swap. That's enough to dismiss his alleged analysis as self-serving propaganda. In most civilized countries, individuals actively campaigning to destroy important financial institutions would be behind bars where they belong.
Yves Smith, an investment banker blogging at Naked Capitalism, sees MBIA's move to suggest further in its testimony that it doesn't need a bailout as "a remarkable bit of chutzpah. Everyone agrees that a loss of a triple A rating will be extremely damaging to the two big bond insurers, but MBIA maintains otherwise."
Smith also has questions about NY Insurance Superintendent Eric Dinallo's plan to break up the bond insurers, shearing off the RMBS and
mortgage-backed CDO junk portfolio and isolating it from the rest of the insurers' book of municipal bond insurance:
... priorities have been turned on their head. Before, the reason for a rescue was to prevent carnage on Wall Street. That objective has now been shunted aside as municipalities are hit by the seize-up in the auction rate securities market ....
... This seems to be a misguided application of the "good bank-bad bank" approach used in the saving & loan workouts.
... It also isn't clear if there is any precedent for setting priorities among policyholdiers in this fashion, by industry.
A further complication is that Dinallo does not regulate #2 monoline Ambac; that falls to the state of Wisconsin, and Dinallo's counterparty there, Sean Dilweg, has been notably silent. And MBIA, the guarantor over which he does have authority, is fighting him tooth and nail.
I haven't seen much discussion around Fitch's assertion in its own testimony that the entire monoline business model may be approaching something akin to irrelevance, but I get the feeling that MBIA's chutzpah is tied directly to defeating that sort of sentiment. A ratings downgrade of the number one player would clearly hasten the logic that is already asking: well, do we really need them? And I'd have to think that would be more damaging to MBIA's business than any sort of actual downgrade -- so the company is taking the fight to the industry, in an effort to ensure that its relevance, perceived or otherwise, doesn't wane as the result of current market woes.
Personally, HW is with Felix Salmon at Portfolio.com; we don't really have a dog in this fight, beyond an interest to see who -- if anyone -- will want to step up and insure new RMBS and (if they continue to exist) MBS-backed CDO issuances when the dust finally does settle.
While the monoline business may or may not be less important in the municipal bond markets due to the unbelievably low incidence of defaults, the guaranty business is actually far more important to the MBS business than most have given attention to thus far -- precisely because defaults can and do happen.
For secondary mortgage market participants, resolving this crisis isn't just a piece of the puzzle; it might be the puzzle. At the American Securitization Conference in Las Vegas last week, many investment bankers suggested on panels and in hallways that the bond insurer mess is the single largest issue keeping the private-party market from having a chance at establishing any modicum of recovery going forward.
Disclosure: The author held no positions in any company mentioned in this story at the time it was published.
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