Ambac has cold feet.
As reported in Tuesday’s FT, the bond insurer has decided not to split. The putative Spitzer plan is not to be. Now only FGIC and MBIA seem to have any intention of separating out their businesses. Which points quite strongly to the fact that this is all about capitalisation – and more specifically what the investors behind that capitalisation are going to allow monolines to get away with.
The octet of banks behind Ambac’s recapitalisation isn’t about to watch its $2bn get frittered away on some regulatory novelty.
The crucial thing here being that, domiciled in Wisconsin, Ambac can avoid a split and investors can afford to push against it. The monoline is beyond the jurisdictional reach of New York Messrs Spitzer, Dinallo et al, for whom the breakup tolled.
But MBIA too, has ballsy investors behind it.
Third Avenue Funds are taking the opposite side of the Ackman trade. Available here, is their annual letter to shareholders, sent out on Monday.
MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business. However, there seem to be three impediments tangential to capitalization that might prevent MBIA from receiving a credit rating of AAA-Stable.
1) The Credit Rating Agencies could be arbitrary and capricious, denying AAA ratings for highly subjective, qualitative reasons such as a supposed severe decline in “franchise value”.
2) MBIA is New York State domiciled with its principal insurance subsidiaries regulated by the State Insurance Department (“SID”) and is therefore subject to regulatory risk. The state leadership including the Governor of New York, Elliott Spitzer, appears not to fully appreciate the financial strength of issuers such as MBIA, and furthermore, MBIA’s utter lack of need for a “Bailout” or a “Rescue”.
3) As has been well reported by the financial media, MBIA is being victimized by an apparently wellorganized bear raid headed by William Ackman (“Ackman”) of Pershing Square Capital Management. While the bear raiders have been helpful to Third Avenue, in making it easier to acquire MBIA Common at depressed prices, the bear raiders might have the ability to adversely affect the going concern attributes of MBIA, given the possible capriciousness of Rating Agencies and regulators.
Caveat lector:
On February 11th, TAVF acquired from MBIA, 10,610,425 shares of MBIA Common at $12.15 per share. This brought the Fund’s holding to 23,148,845 shares of MBIA Common, or about 10% of the issue outstanding. Previously, Third Avenue also had acquired $197,000,000 of 14% Surplus Notes issued by an MBIA insurance subsidiary. Since December 2007, MBIA has raised about $2.6 billion of new capital, of which TAVF has supplied almost $326,000,000.
(But then, so too does Bill Ackman have a vested interest – albeit a wildly more successful one.)
Third Avenue might have confidence in MBIA, but does MBIA have confidence in MBIA? Yves Smith points us in the direction of a largely unreported section of MBIA’s letter to shareholders last week (via Bloomberg)
Chief Executive Officer Jay Brown also said he has “questions” about the company’s 2007 preliminary results released last month and hasn’t yet signed off on the statements, according to a letter to shareholders today.
The situation for MBIA this week?
….according to a regulatory filing on Feb. 29. Armonk, New York-based MBIA said it couldn’t estimate January’s losses…..An estimate for losses through Jan. 31 “is not available at this time,” MBIA said. The company said it “observed further widening of credit market spreads,” indicating the value has declined.
A lot then, is up in the air for MBIA. All odd, considering Ambac is the one still on ratings watch negative.