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Smart Money Betting on Bond Insurer Payoff: Street Whispers

NEW YORK ( TheStreet) -- Bond insurers MBIA (MBI - Get Report) and Assured Guaranty (AGO - Get Report)have been some of the hottest investments in the financial sector over the past five days, and while most Wall Street analysts long ago dropped coverage of these companies, big name investors are increasingly betting they can continue their rebound.

In the second quarter, hedge fund Perry Capital upped its stake in MBIA and Assured Guaranty to three million shares from 30,500. Perry, a protégé of former Treasury Secretary Robert Rubin when both men were at Goldman Sachs, joins Morningstar fund manager of the decade Bruce Berkowitz in betting MBIA can hang on long enough to win a multi-billion dollar settlement from Bank of America (BAC) and get back into the municipal bond insurance business.

Investors were reassured on that count after MBIA reported second quarter earnings after the market closed Aug. 8. Since that time, shares are up 18.72% through Wednesday, when they closed at $13.41.

Assured Guaranty shares started running ahead of the company's Aug. 10 earnings report, possibly on investor optimism following MBIA's results. From the Aug. 8 close through Wednesday, Assured's shares have jumped 16.61%. Top shareholder WL Ross & Co., which bought 10.65 million Assured Guaranty shares in April 2008 at an average price of $23.47, now looks to have made the right decision as the investor steadily accumulated just under 9 million shares in the ensuing years, never paying more than $12.

While both MBIA and Assured Guarantee got way over their heads insuring mortgage backed securities in the 1990s and early 2000s, they have so far managed to remain solvent, while competitors were driven out of business. They now want to get back to their traditional role insuring municipal debt.

Some have their doubts about muni bond insurance, including Warren Buffett, who after taking a stab at the industry in 2008 concluded a year later it was a "dangerous business," because, as he wrote in his annual shareholder letter, "what mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far away bond insurer?"
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