The Five Dumbest Things on Wall Street: March 7

3. Marty Whitman's Victim Card

In a battle over the bond insurers, one high-profile value investor will walk away with egg on his face.

In one corner, the legendary Marty Whitman of Third Avenue Funds revealed this week that he recently boosted his stakes in MBIA MBI and Ambac ABK. He said in a letter to his clients that there's "much profit to be made in" both companies, whether they continue as going concerns or write no new policies and sell off their existing business.

Whitman bought $326 million of the $2.6 billion that MBIA recently raised in new capital through note sales.

"It ought to qualify easily for an AAA rating with a $17 billion claims-paying ability," said Whitman. "If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business."

In the other corner is Bill Ackman of Pershing Square Capital, who has maintained since 2002 that triple-A credit ratings for MBIA and Ambac are fraudulent. Ackman has big short bets on both companies, arguing that neither has enough capital to cover claims that are in store on their massive structured finance portfolios, which are largely tied to the mortgage market.

While Ackman has lashed out at the bond insurers and the credit ratings agencies that depend on their business, Whitman has taken a page from the bond insurers' playbook by laying down the victim card and blaming Ackman for their troubles.

"MBIA is being victimized by an apparently well organized bear raid headed by" Ackman, said Whitman. "While the bear raiders have been helpful to Third Avenue, in making it easier to acquire MBIA common [stock] 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."

As far as well-organized bear raids go, this one has been pretty successful so far. Shares of MBIA have collapsed over the past four months, losing 72% of their value. Meanwhile, Ambac is down 87%.

After weeks of anticipation of a bailout plan for Ambac, the company announced Wednesday that it will try to sell $1 billion in common stock and $500 million worth of equity units -- notes that must be converted to common stock in May 2011. That fell short of the $2 billion that it was expected to raise, and it included no commitments from bankers and no plan to split its safe municipal bond business away from its toxic structure finance portfolio.

"In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac," said Ambac CEO Michael Callen.

Shares of Ambac responded by losing a quarter of their value over the next two trading sessions. MBIA shares shed 11%. Oh, and both companies have disclosed that they're finding no new business in 2008.

Dumb-o-meter score: 85. Marty, how do you like your eggs?