Bond insurer MBIA hit back on Thursday at Pershing Square’s Bill Ackman – the hedge fund manager who has made a fortune shorting the monolines. Outsiders seem to be finding value in the bond insurer business too.
MBIA’s testimony to the US House capital markets subcommittee is available here. It seems that a lot has been redacted from the copy Reuters got hold of on Thursday. MBIA takes issue with a number of flaws in Ackman’s model. But it’s not a very clear-cut trouncing.
It’s slightly disingenuous too of MBIA to imply that “serious analysts” disagree with Ackman. As Yves Smith at Naked Capitalism points out:
This posture conveniently ignores that rating agency Egan Jones and several Wall Street analysts have posted even more dire loss forecasts than Ackman.
Whatever its flaws, Ackman’s model has thrown up a number of truths: lest we forget the multi-billion dollar slew of abortive recapitalization attempts?
And even while MBIA’s testimony might indicate that insolvency isn’t quite on the horizon, it doesn’t address the more pressing issue at hand: are these AAA institutions?
But forget all of that, because the ball might just well and truly be out of the monoline’s court.
NY Governor Eliot Spitzer also gave testimony to the House committee. As the FT reported Spitzer has given the bond insurance companies five days. If an in-house market-led solution isn’t sorted by then, they’ll be broken up. Insurance superintendent Eric Dinallo elucidates:
We have been actively discussing all of the options with the bond insurers and, if necessary, we will consider allowing the bond insurers to split themselves into two companies. One would have the municipal bond policies and any other healthy parts of the business. And there is no reason to believe that this cannot be a healthy business. The other would have the structured finance and problem parts of the business.
We would ensure that the funds paid by municipal governments would go to support their insurance, and not pay for the problems in structured finance. We believe that this plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds.
And who is waiting in the aisle?
It was to ensure a safety net for the municipal bonds that over the Martin Luther King Day weekend in January we asked Berkshire Hathaway to price the entire municipal bond portfolio of the three largest bond insurers. Earlier this month, Berkshire sent its proposal to the three companies. I believe that there may be other investors who would be interested in investing in the municipal side of the business.