For bond insurer
, it may be looking like 2002 all over again.
Five years ago, hard-driving activist hedge fund manager Bill Ackman of Pershing Square Capital questioned the credibility of monoline insurance companies, penning a scathing and lengthy report on MBIA. He argued that the credit insurance company didn't deserve its triple-A rating.
Ackman on Wednesday renewed the long-running hostilities at the third annual Value Investing Congress, at the Time Warner Center in New York, saying that the firm was headed for financial ruin by as early as the second half of next year, and that some of its practices should raise eyebrows among regulators.
"The company strongly disagrees with Mr. Ackman's statement that the company will be insolvent in the second quarter of 2008," Jeff Lloyd, an external public relations official, tells
on behalf of MBIA. "He made similar statements in 2002, none of which have come true."
Ackman, who has a significant short position in MBIA and
, spotlighted MBIA, alleging that it also may have engaged in unsavory transactions by making speculative derivative transactions and by borrowing funds indirectly from reinsurance subsidiaries. The spokesman declined to comment, saying that MBIA had not had time to fully review Ackman's accusation about its investment practices.
Whether Ackman's accusations turn out to be true may be moot if the monoline businesses run aground due to the deteriorating conditions in credit.
Indeed, shaky markets and a gloomy outlook for the housing sector have turned Ackman into a modern-day Cassandra on the monoline insurance business.
Values on many of the securities that they insure, including esoteric collateralized debt obligations, or CDOs, have plummeted, placing intense pressure on these firms.
Monoline insurers essentially provide added protection to investors against losses in securities from municipal bonds to structured asset-backed securities to CDOs. Most companies are under pressure to bolster their capital reserves to pay out possible defaults by ratings agencies Standard and Poor's, Moody's Investors Service and Fitch Ratings, which are threatening downgrades.
The insurance monolines offer on these debt securities allow them to receive a more favorable credit rating than they would otherwise, making the investments more palatable for institutional investors, including pensions and insurance companies, which often cannot purchase debt below triple-B.
The implications for a big bust of monoline insurance firms would be a major blow at an already testy time in the markets, because their insurance wraps guarantee trillions in debt, including CDOs held by banks and brokerages.
Beyond Ambac and MBIA, which have been the cause célèbre of Ackman for half a decade, other firms under stress include privately held
Financial Guaranty Insurance
CIFG has already received a $1.5 billion bailout from
Groupe Banque Populaire
Groupe Caisse d'Epargne
, which agreed to take control of the monoline from their Natixis banking subsidiary.
Bad news for monolines, however, may mean boffo returns for others.
Ackman said his short bets against Ambac and MBIA could result in hundreds of millions in profits. He has earned respect on Wall Street by agitating for change at
and most recently
Ackman has been betting that the stock of MBIA will fail since he published his research report five years ago. He said during the Value Investing confab that if he is right, he will donate his personal share of the money he generates to charity.
Pershing Square has about $6 billion of assets under management.