MBIA

  • 03 Jan 2012 at 6:33 PM

Countrywide Might Have Been Better Off Herding Goats

By Matt Levine

While we were out some people who keep to a less rigorous vacation schedule than we do wrote some stuff about complexity in finance. Lisa Pollack at FT Alphaville started the ball rolling by attributing increasing complexity in finance to increasing smartness in the financial industry. This is a delightful theory if you are or were in the financial industry, particularly if you were tasked with developing financial instruments, so we’ll go ahead and endorse it.

Others, however, disagree. Here is a very nice thing at Interfluidity that various financial pundit types found life-changing:

Like so many good con-men, bankers make themselves believed by persuading each and every investor individually that, although someone might lose if stuff happens, it will be someone else. You’re in on the con. If something goes wrong, each and every investor is assured, there will be a bagholder, but it won’t be you. …

If the trail of tears were truly clear, if it were as obvious as it is in textbooks who takes what losses, banking systems would simply fail in their core task of attracting risk-averse investment to deploy in risky projects. Almost everyone who invests in a major bank believes themselves to be investing in a safe enterprise. Even the shareholders who are formally first-in-line for a loss view themselves as considerably protected. The government would never let it happen, right? Banks innovate and interconnect, swap and reinsure, guarantee and hedge, precisely so that it is not clear where losses will fall, so that each and every stakeholder of each and every entity can hold an image in their minds of some guarantor or affiliate or patsy who will take a hit before they do….

This is the business of banking. Opacity is not something that can be reformed away, because it is essential to banks’ economic function of mobilizing the risk-bearing capacity of people who, if fully informed, wouldn’t bear the risk. Societies that lack opaque, faintly fraudulent, financial systems fail to develop and prosper. Insufficient economic risks are taken to sustain growth and development. You can have opacity and an industrial economy, or you can have transparency and herd goats.

This is delightful too, and features goats; my guess is that it’s mostly wrong but I don’t count that against it. One objection to it – though not a decisive one – is that it is wrong about the psychology of the people creating the financial complexity. People who design swaps and reinsurance and guarantees and capital structures actually want to know, really really clearly, what happens when things go bad. Part of the proliferation of complexity – not opacity, complexity – is the desire to have that definition. That’s what a CDO is. It’s slicing the world into possible future states and clearly defining who gets what payouts in those future states. Simple banking is “I will put equity into a bank, you will put a deposit in, I’ll loan out the money and whatever we get back goes first to you then to me.” Complicated banking is “that, but also if we don’t get the money back because of reason X, insurer A pays; and if we don’t get it back because of reason Y, noteholder B pays; etc.” Complexity is a move toward greater definition, greater clarity about where losses will fall, not less.
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  • 03 May 2010 at 2:45 PM

Pershing Square Has An Official Rule About Kicking People In The Nuts

By Bess Levin

As you’re likely aware, one of the most important skills to master when you’re in this money making game is to be able to regulate your emotions. You can’t freak out every time you lose a little cash, and on the flip side, it’s probably a good idea to avoid doing an end-zone dance on the days you make it rain. Many of Wall Street’s most successful investors have perfected the art of staying cool and calm, with the best of the best being basically dead inside. Then you have Bill Ackman.

The Dead Inside model is not the one he’s chosen to follow over the course of his career. On the contrary, Bill is stuffed to the gills with emotion, and often feels compelled to let them out. No, scratch that. Letting his salty tears flow is not a choice, just like Ackman’s passion for standing up to institutions like MBIA and saying “J’accuse!” wasn’t a choice, it was his duty.

Obviously these raw and uncut displays of what Bill’s feeling haven’t prevented him from doing pretty well for himself. They have, however, caused a certain amount of agita for those around him. Bill’s visible tears at last year’s Target shareholder meeting were deeply distressing to Joe Nocera, who hasn’t yet evolved to the point where he’s comfortable seeing a grown man cry. And in Christine Richard’s Confidence Game: How A Hedge Fund Manager Called Wall Street Bluff, we learn of a couple other instances in which Bill’s inability to keep it locked up– one the adorable quirks we love most about him and probably the source of his success!– resulted in some minor and major fallout (making an employee uneasy and the enacting of the aforementioned Nut Kicking Rule, respectively). Richard writes: Continue reading »

  • 30 Apr 2010 at 5:51 PM

MBIA Fraud Suit Against Countrywide to Proceed

By Zachery Kouwe

MBIA, the mortgage insurer that decided to back all those subprime securities underwritten by Countrywide and others, will now have its day in court.

A judge ruled earlier this week that MBIA can proceed with its fraud claim against Countrywide (now Bank of America.) The insurer claims Countrywide lied when it told MBIA the mortgages being insured were “in in strict compliance with its underwriting standards and guidelines.” Continue reading »

  • 24 Mar 2010 at 12:00 PM

What Did Bill Ackman Eat For Lunch The Day He Told MBIA’s CEO To Stuff It?

By Bess Levin

As many of you are aware, when Bill Ackman was just a young pup of a money manager, before he was coming up with genius one-stock funds, he placed a bet against MBIA, based on Ackman’s belief that the company’s AAA rating was the stuff of bull shit.  No one had ever dared question the bond insurer, so when its CEO, Jay Brown, got wind of the news,  he demanded Ackman show up to his office to discuss the matter, probably referring to the meddlesome manager as “the little pissant” under his breath.  Or something.  Doesn’t matter.  What does matter is what Bill was noshing on before the meeting.  It’s something I’ve been thinking about for years as have many of you, as conversations with you leading lights would indicate. Today, finally– finally!– we have an answer.

Before his meeting with MBIA’s CEO, Ackman had lunch with Michael Ovitz, the founder of Hollywood’s Creative Artists Agency and a longtime investor in his fund. As they worked their way through six different versions of toro, the Japanese fatty tuna delicacy, Ackman asked Ovitz’s advice about the upcoming meeting with Brown. “It sounds like a very Japanese meeting,” Ovitz said. In other words, he said, “Just shut up and listen.”

Oh, and here’s how the meeting went (spoiler alert: not great-ish. Because Ackman’s hands smelled like fish. I’m kidding, it’s because Jay Brown was raised in a barn). Continue reading »

  • 26 Jan 2009 at 12:25 PM

I Want My Two Dollars

By Equity Private

What will we miss most about the last few years? Well, the list is long, but high up on it is Bill Ackman’s skewing of MBIA. That trade was a brutally long campaign, and caught Ackman a lot of flak from MBIA’s PR efforts, but it paid off in the end. Apparently, he has unwound it, finally. Waiting on the last two dollars might have been bouncing the rubble. After a 78% drop in 2008, I’d think about unwinding too. Then again, while he’s been in MBIA with Pershing Square for some time, his short view on the stock dates back much longer: seven years or so.

Ackman first thought MBIA’s stock and bonds would fall in 2002 when he oversaw Gotham Partners, a New York-based investment firm. He wrote a 62-page report casting doubt on the AAA ratings at MBIA’s insurance unit, and last year seven bond insurers lost top rankings as losses on securities backed by subprime mortgages soared.

Sexy graphs after the jump.

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  • 24 Oct 2008 at 1:56 PM

TARP for MBIA?

By Equity Private

I’m sure there is someone less deserving of Treasury assistance than the likes of MBIA. There are, after all, still some felons out there that could use a couple extra million. Still, since everyone else is slurping at the bailout well, might as well throw in insurers. Right?

MBIA, the largest U.S. bond insurer, and its No. 2 rival, Ambac Financial Group, met with regulators earlier this week to push for a way to tap into the federal government’s bailout plan.
New York Insurance Superintendent Eric Dinallo, the main regulator for MBIA, and Wisconsin insurance commissioner Sean Dilweg, Ambac’s primary regulator, convened in New York to discuss the matter with the firms.
Both companies have seen business grind to a near halt after large losses on mortgage debt guarantees, and subsequent rating cuts.

Watch out MBIA shorts.
U.S. Treasury mulls insurer aid program-sources [Reuters]

  • 08 Aug 2008 at 2:30 PM

Bond Insurer To Sue Hedge Fund For Speaking Truth?

By Bess Levin

The following copy has been revised so as not to offend the delicate palates of a select few. These individuals were brave enough to speak up against the injustice I apparently inflicted on the English language with the previous version of this post (it contained two run-on sentences and the phrase “in my medical opinion,” which made me sound “unintelligent”). Please thank them for acting as a sort of neighborhood watch group, and keeping me in line.
MBIA said today that it may sue Pershing Square Capital founder Bill Ackman. For the last six years, the hedge fund manager has “waged a campaign” against the bond insurer, and this year stated publicly that the company may be insolvent. Apparently MBIA’s decision to “assess all [its] options, including litigation,” is in response to an anonymous e-mail the company received, asking if it planned to follow-up on New York State Insurance Superintendent Eric Dinallo’s comments last month that “rumor mongering” about the solvency of an unnamed bond insurer (see if you can guess which one) by an unnamed short-seller (see if you can guess who) “crossed a line.” Rest assured Carney and–fingers crossed– Andrew Ross Sorkin will have more to say on this later.
MBIA May Sue Short-Seller Ackman’s Pershing Square [Bloomberg]
PS:

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  • 12 May 2008 at 3:15 PM

Update: Charlie Gasparino’s (Stomach Has) Got Something To Say

By Bess Levin

Sooo. Moments after we announced our latest market moving experiment, inspired by the stomach rumblings of Charlie Gasparino, C to the G called us to “set the record straight.” Gasparino, who seemed a bit perturbed at Barron’s writer Jonathan Laing’s suggestion that he’d been fed the “Ambac or MBIA will be downgraded” story by Bill Ackman, told us: “A lot of journalists take shots at people without calling them first. This guy lacks the integrity to call me first and at least find out if something is right or wrong. He failed Journalism 101.” Prepared, network-approved comments aside, however, we’ve heard that Gasparino put it slightly less lightly to friends, saying: “This guy didn’t have the balls or the brains to call me. If he had half a brain or half a testicle, he would have at least dialed me up before I fly out to Chicago and dial him up. I hope he sleeps well tonight.” When asked to confirm that the harsher, mildly more litigious words had exited his mouth, CG only offered “no comment.” You do the math. (And: start doing something with that Bear news I mentioned. Time’s running out!)

  • 12 May 2008 at 2:28 PM

Breaking News From Charlie Gasparino By Way Of The Nitrates Acting Up In His Stomach

By Bess Levin

Barron’s has an article today about how even though no one knows anything about credit-default swaps, few people can resist speculating, the analysts in Charlie Gasparino’s lower abdomen included. Around 3 pm on January 30th the CNBC on-air editor said he “felt in his gut” that Ambac or MBIA or both would be downgraded. Nothing happened, but shares of both companies plummeted on the news. That’s right people—the gastrointestinal discomforts of Charlie Gasparino, who we’re told was seen wolfing down an Italian sub with rapidity that would distress even the steeliest of bellies, are now causing turmoil in the markets. So ridiculous we wish we could take credit for making it up. Damn you, Charlie Gasparino, for subconsciously ginning things up in response to our obsessive chronicling of your every Dago-esque utterance. It’s almost as though you want to make it impossible for us to parody you. Attributing insider information to the sources in your stomach is something WE do, not you.
Anyway. We can’t be too hard on Gasparino’s prognostication skills because, truth be told, who cares about being right or wrong when you’ve got that kind of power? Though we could never hope to match his market moving ability, we have decided to perform a small experiment of our own, just to see how we match up. Here’s the rub: we had some bad Chinese last night and are starting to feel violently ill. That’s got to mean something, no? At random points throughout the day, we’re going to pin the feelings of nausea waving over us to a little piece of news that we know isn’t true, and see what happens. Starting now: We feel in the pit in our stomach that Bear Stearns is going to pre-announce record earnings on the strength of its subprime mortgage funds. Make of that what you will.
Credit-Default Swaps: Weapons of Mass Speculation [Barron's]

Is Muni Bond Insurance A Racket?
The Portfolio Gang Responds!

By John Carney

Although it looks like MBIA is now out of the woods, rival bond insurer Ambac’s fate is still murky. Reports indicate that the ratings agencies are now considering the rescue plan worked out by banks and state insurance regulators. The plan may be revealed as early as this week, and will probably involve splitting Ambac in two to segregate the municipal bond insurance business from the less healthy business of insuring riskier credit products.
Last week Holman Jenkins pointed out that segregation is unfair to customers who bought insurance on CDOs because it would “retroactively award municipal clients privileged status at the expense of other clients with equal claim on the insurers.” Bill Ackman, who has been shorting the bond insurers for years, raised a similar point. Indeed, Jenkins expects that the policy holders left with guarantees from the suddenly even more precarious side of the business will launch lawsuits to prevent the break-up.
There’s also a much stranger objection to the segregation plan, one stemming from an objection to the very existence of municipal bond insurance. We first heard about it in Portfolio, of all places. In the latest issue Jesse Eisinger argues that municipal bond insurance is a scam, and it’s victims are municipal governments. This will no doubt come as a surprise to state regulators and treasuries who have been on knife’s edge fearing that the collapse of the bond insurers would make raising money costlier or, in some cases, perhaps impossible. If the governments are the victims here, why exactly are they working to keep the victimization going?

Continue reading »

  • 20 Feb 2008 at 8:46 AM

Dinallo’s Strong Arm Tactics

By Joe Weisenthal

Eric Dinallo, the former Spitzer aide who is now New York State’s insurance regulator, insists that the bond insurers are not on the verge of insolvency. But his plan to split the municipal bond business from the rest of their business only makes economic sense if it were necessary to save the companies and preserve value for the safest policy holders. So why is Dinallo so aggressively inconsistent?
What really seems to be going on is an attempt to strong-arm the banks by threatening them with the worst possible outcome of being left holding insurance that probably isn’t worth the paper its written on. If they won’t inject capital, Dinallo seems to be saying, he’ll make them pay through write-downs arising from the downgraded remnants of the broken-up insurance companies. Ugly.