On Thursday, we wondered out loud what was going on with monoline MBIA. They said they were going to meet Fitch’s target of $1bn extra capital by the end of January, and so keep their AAA rating. That AAA rating being essential to MBIA staying afloat as a bond insurer.
But shares tanked because MBIA also announced it was slashing it’s dividend.
And possibly also because, $1bn or not, MBIA shouldn’t be rated AAA.
Later on Thursday, Bill Ackman, of Pershing Square – the massively successful MBIA shorting outfit (and sometime hedge fund) -spoke to Bloomberg:
MBIA Inc., the largest bond insurer needs to raise at least $10 billion in capital to protect policyholders against losses on securities backed by subprime mortgages, said William Ackman, president of Pershing Square Capital Management.
“Most every week we have increased our short position,” Ackman said.
Ackman said he increased his predictions for the amount of losses MBIA will take to $10 billion after the bond insurer yesterday said it had guaranteed $9 billion of so-called CDO- squareds, collateralized debt obligations backed by other CDOs. That was more than the $8.1 billion previously disclosed, Ackman said. MBIA, which insures more than $650 billion of bonds, has been forced to seek more capital to protect its AAA insurance company ratings as the value of the debt declines.
In other words, the $1bn Fitch requirement – and the models run by the other raters, Moody’s and S&P – are looking shaky. Now Ackman has, of course, a vested interest in all this MBIA bashing, but it’s also unlikely he’s making things up.
Consider, for example, the Goldman research note on banking writedowns last week. In analyst William Tanona’s breakdown of banks’ structured debt exposures, he said that CDO squared transactions could expect to be written down by 100 per cent – so less, “written down”, more “written off”. And MBIA says it has $9bn in contracts on these.
What’s more, Ackman doesn’t think MBIA’s planned $1bn surplus notes sale is worth the paper it’s written on. He also told Bloomberg:
Ackman said the terms of the surplus notes, sold by MBIA’s insurance unit, may mean holders won’t receive interest or principal payments.
MBIA can only make the payments with the blessing of the New York State Insurance Department, according to a preliminary prospectus. The department may decide to make MBIA keep the cash rather than pay out on the notes, Ackman said.
“The superintendent’s job is to protect the policy holders,” said Ackman. “He will take the money in but he’s not going to let any money out until he’s sure the company is adequately capitalized.”
With all this in mind, though, the rating agencies are still optimistic that MBIA will keep its AAA rating come month-end.
Someone here is wrong. Ackman, or the raters?