MBIA: No Bailout Needed, But We Could Use Some Help with Those Pesky Short Sellers
In testimony delivered today to the House Financial Services subcommittee on capital markets, MBIA CFO Charles Chaplin blamed 'activist' short sellers for much of the company's current predicament, and said that the maligned bond insurer was "well-capitalized" and not in need of any bailout attempt.
"First, the notion of a 'bail out' of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced," Chaplin said. "For this reason MBIA does not see the need for a Federal bailout of the financial guarantee industry."
Numerous monolines have been the target of bank-led bailout efforts, in conjunction with an organizing effort from New York Insurance Superintendent Eric Dinallo. In his own testimony, Dinallo said that his office has been floating around the idea of breaking up the monolines in order to protect the "healthy" part of their businesses.
Insurers' decision to provide financial guarantees on mortgage-backed securities and CDOs have driven all of the market problems thus far, and Dinallo apparently wants to isolate that book of business.
"We cannot allow the millions of individual Americans who invested in what was a low-risk investment [municipal bonds] lose money because of subprime excesses," he said. "Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects."
Looking for blame, a crisis of investor confidence
MBIA's Chaplin also said "activist short sellers" have "gone to substantial effort to undermine the market confidence that is critical to MBIA's business," taking direct aim at Pershing Square's Bill Ackman, whose well-documented short position and associated research suggesting that the monolines are undercapitalized have caused quite a stir.
Chaplin blamed Ackman nearly entirely for preventing MBIA from being able to raise additional capital, saying his "actions were carefully timed to coincide with individual elements of MBIA's capital raising program." The MBIA CFO said he wanted regulators to work with the Securities and Exchange Commission to "to curtail the unscrupulous and dangerous market manipulation activities of short sellers."
The Financial Times' Alphaville blog was buying none of it, however, in a post titled 'Monowhine':
Unable or unwilling to actually explain itself, or its problems, the bond insurer has decided instead that its whole crisis has been caused by Bill Ackman, who is shorting its stock via his hedge fund, Pershing Square.
Nevermind the fact that Bill Ackman has been shorting MBIA shares for two years - well before the problems for MBIA really took off ...
The defence is patently absurd, and elsewhere in the deposition, MBIA is pointedly vague. Explaining its capital position, MBIA states â€œthe standard has been somewhat of a moving target.â€? Odd that, for a sitting duck.
Michael Callen, Ambac's newly-installed CEO, was more subdued in his remarks than his industry counterpart. Callen also suggested, however, that the current crisis was also one of investor confidence moreso than an issue of financial stability.
"The current uncertainty surrounding bond insurers' ratings, when combined with illiquid and anxious credit markets, means greatly diminished demand from investors," Callen said. "Demand from issuers, however, is not diminished. Issuers continue to anxiously await the reopening of the market."
Keith Buckley, Fitch Ratings' global head of insurance, said that despite issuer interest, such a market rebound may be further off than most would like.
"Fitch believes the outlook for the bond insurance industry is highly uncertain," Buckley said, "and that it is likely that several companies may ultimately exit the market via voluntary runoff." He also dropped perhaps the largest bomb in the entire hearing, suggesting "that bond insurance may be a helpful, yet nonessential product for the economy."
More than a few commentators have speculated recently that the monolines are more or less fighting for their relevance; but Buckley's remarks represent the first time a market participant has echoed such thoughts. (And a rating agency, no less.)
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