Tuesday, July 22, 2008
Changing tone on MBIA
I still have no opinion whatsoever on the solvency of the insurance company. [I intend to do that work - and if I form an opinion that is worth having then I will again take a position in the stock.] I now however take the view that if the insurance company is bad the parent company is likely bad.
And that the statement by Jay Brown about parent company liquidity in a recent letter to shareholders is actively misleading.
I have retained my holding in Ambac.
I make plenty of mistakes. This sort of mistake I enjoy. I made a profit.
Thursday, July 10, 2008
MBIA and GICs - a follow up
One hedge fund manager also emailed me with the same possibility – that the GICs issued by MBIA (and MBIA) will impact parent company liquidity through cross default provisions.
Not so fast
With Ambac it is easier. Here is a corporate structure of Ambac.
The GICs are written by the a subsidiary of Ambac Capital Corporation – not by the parent. They are reinsured by the main reinsurance entity. After that they are guaranteed by Ambac Financial Group (the holding company).
If the GICs get called Ambac has a simple option. Bankrupt Ambac Capital Corporation and pay out of the insurance company. It won’t touch the holding company liquidity provided that the holding company has not guaranteed Ambac Capital Corporation (which as far as I know it has not).
I believe the same structure applies at MBIA. Indeed this Moody's report notes that the GIC business is carried out by a separate subsidiary. If that is the case then the WSJ is straight wrong. It’s a little harder for me to identify the relevant subs because I have not read the contractual terms of any GIC. If you have such documentation let me know.
Wednesday, July 9, 2008
MBIA holding company credit default swaps
As regular readers know I have no opinion as to whether Ambac and MBIA are long-term insolvent at the insurance company level. I really have no idea whether losses will be 2 billion or 20 billion. [I am long the stocks as of a few days ago - but I have no opinion about long-term solvency and when I purchased them I thought there was a reasonable chance that the end-game for both companies was zero.]
I believe that losses will be lower than is implied in the market prices of mortgages, but higher than is indicated in the loss reserves of most banks. That is a very wide band – and for detail within that band you are reading the wrong blog.
I do have something to say about the insanity of the market at the moment. It is about MBIA parent company credit default swaps… I think people holding that parent company default swap are insane.
Background
It is highly unusual in the
It is possible after the bankruptcy of the subsidiary for the regulator to sue the parent company based on fraudulent conveyance or some other rule. But the regulator has no prima-facie right to go after the holding company. (The California Commissioner sued Fremont General arguing fraud. Fremont settled for a large sum of money - but the holding company is still not on the hook for the insurance company liabilities...)
So how is it with MBIA?
MBIA holding company to the best of my knowledge (and having read a few statutory statements) has never guaranteed the insurance subsidiary.
MBIA holding company has well over a billion in cash (including the recently raised money). It got this with its recent capital raising – and was originally going to inject that cash into the regulated subsidiary to maintain the AAA rating.
So the MBIA holding company is loaded. Indeed the net cash holdings of the holding company is slightly larger than all holding company obligations. At some point (somewhat lower than here) MBIA becomes a Ben Graham stock.
The point however is that it is highly unlikely for the holding company to go insolvent. Moreover almost all of the holding company debt is due after 2012 – often quite a long time after 2012.
Is everyone mad?
How can MBIA holding company go bust?
- Well the first way that the holding company can go bust is to inject the holding company money into the insurance company and not be able to get it back. That is what Whitney Tilson – a vocal short – wants to happen. It is also what the insurance commissioner wants to happen but the insurance commissioner motivations are different.
- The second way is that MBIA uses its holding company loot to buy back lots of shares at the current price – and runs itself out of holding company cash. Certainly MBIA has indicated that it is interested in buy-backs – but I doubt they are that interested.
- A third way is for the company to inject the money into a new (and hence AAA rated) subsidiary and not be able to get it out of the new subsidiary. Ambac is trying to do that with its existing subsidiary (Connie Lee). However that money is to come from the regulated insurance company and not the holding company.
- A fourth way is that the insurance commissioner manages to successfully sue the holding company. That seems unlikely to me – but courts are a crap-shoot and anything is possible.
Full disclosure: the position in Ambac is many times as large as the small position in MBIA. More so after yesterday's trading...
Thursday, July 3, 2008
Things I stuffed up – edition one - Interest rate risk versus credit risk
So this is the first of (almost certainly) many posts detailing things I stuffed up.
The list for the first choice is long. How about these?
(a) Believing that regional banks of Credit Agricole (which are very good) would offset the losses at the investment bank (which is very bad). Stock is down from 36 to 12.
(b) Believing that the mortgage insurers would blow up this cycle but the bond insurers would probably be OK. Ambac is down 90 to
(c) Believing that the (seemingly extreme) valuation difference between News Corp and other media stocks would solve itself by New Corp’s stock price rising. It didn’t as a stock price comparison of Viacom, Time Warner and News Corp will attest. (It was a wash – all the stocks lost a little.)
(d) Buying Origin Energy at under $2 and selling it at about $4 on the basis that the utility parts of the business were fully recognised. I sold it despite loving the management. It is currently under hostile takeover at $15.60 – and the Aussie dollar in which it is priced has almost doubled. I didn’t recognise just how good the gas assets were. This was non-trivial as the fund I worked for owned almost 5% of the company – and left more half a billion dollars on the table and it was my fault.
Background
The
I will get back to this shortcoming one day soon.
John
Sunday, June 29, 2008
Whitney Tilson on MBIA
To me the key difference between the AA guarantors and the AAA guarantors was that by-and-large the new players in this industry (such as ACA Capital Holdings) had to post lots of collateral in the event of problems - accelerating liquidity concerns and hence bankruptcy. The AAA guarantors by-and-large had to pay when the liability fell due.
This is a huge difference. I have argued several times (see here and here) that the price of various bits of paper in the secondary market is irrational. However I have no idea what the rational price is. Nor does anyone else - not the shorts, not the longs - not anyone.
If you have to mark to market the books of financial institutions they are almost all insolvent. There is an enormous amount of paper that is 20 bid, 90 offered, price you could actually get something closer to 20. If you have to collateralise based on actual values you could get in a trade now (or sell illiquid assets to buy liquid ones for use as eligible collateral) you are stuffed. Simply stuffed.
But if you can sit it out then you are possibly OK. The reason - the defaults might be much lower than currently anticipated in market pricing. Regular readers will know my view is that defaults will be lower than current market prices. I just don't know how much lower and hence I don't know what the end-game is for someone who is levered to this stuff but does not need to post collateral.
ACA Capital Holdings had contracts that demanded it posted collateral and that smashed them up - simply smashed them. Their website is indicative of what happened to the company. But the case for Ambac and MBIA was that by-and-large they did not have to post collateral and hence had hope.
However we now know that MBIA in particular has large collateral requirements. I know of a few more contracts that potentially involve collateral at MBIA. Cumulatively they matter a great deal.
If you are thinking about the bond insurers as a buy (and I am) the collateral requirements are the critical issue. If you don't have collateral requirements then the end points are all that matter. If the things you have insured default at a (much) lower rate than the market currently thinks (something that is possible) then you will make money.
For now you have the hope of much lower end-point defaults. Hope means the stocks have value. Option value only - but as the end outcome is a long way away and a lot of things can happen there should be quite a lot of option value. [One possibility for instance - there is a lot of inflation over say ten years which reduces the real value of the liabilities or increases the nominal value of the assets that back them. That could be a blessing to a bond insurer.]
If you have collateral requirements then end-point solvency is not all that matters. You need to be continuously solvent and on current market prices you are not solvent right now. Whitney Tilson's article is the first widely available and easy to follow discussion of the collateral requirements of MBIA. And this is the critical issue for the stock. Read it.
Now please please contact me if you have done a similar run through Ambac. I have not - but I knew of far less that was collateralised at Ambac than MBIA. And that matters. It's why I sometimes think I want to punt on Ambac. [Indeed I have at various times - but have hedged the position shorting Ambac debt and made good profits by sheer luck. Those were not super speculative positions. Buying Ambac common without shorting the debt is a massively speculative position.]
John
A note - the saga of MBIA saying for years that they had few collateral requirements and then revealing billions of dollars worth of them tells you about trusting management. I can't just ring up Ambac management and ask them about collateral requirements. If you had done that with MBIA you got creamed.
Indeed some very fine fund managers got creamed doing precisely that.
Ronald Regan was right: "trust but verify".
=======================
Post script: I do not agree with everything that Whitney Tilson writes in his Seeking Alpha article. I strongly disagree with his assertion that MBIA has an obligation to downstream the $900 million sitting in the parent company. The buyers of guarantees from MBIA purchased them backed by stated regulatory assets of MBIA's insurance subsidiary not the MBIA parent company. I see no reason why MBIA parent company should increase those regulatory assets unless they are contractually obliged to do so.
Of course Whitney (talking his book) has a different view. I have a suggestion: next time Whitney invests in a stock that goes to zero he should pour more of his clients' money in just to make the creditors happy. (He argues that MBIA should do this with shareholder capital and its insurance subsidiary). If Whitney acts as irrationally as he is demanding the management of MBIA act then I am sure the creditors of his bankrupt investment would thank him.
For once - and perhaps the first time - I find myself strongly agreeing with Tom Brown of Bankstocks.com. [I can't tell you how many times I have thought Tom is speaking nonsense.]
Tuesday, June 24, 2008
A piece of a company can go bankrupt - Mish on MBIA
This has caused much consternation amongst regulators and rating agencies. But is - in my opinion - in the interest of MBIA shareholders. It clearly reduces the strength of the operating subsidiary but increases the strength of the holding company. Mish disagrees:
The statement by Moody's that the parent company is stronger because it is not funding its insurance unit is ridiculous. A piece of a company cannot go bankrupt.Mish is obviously not an insurance regulatory guy. Pieces of companies go bankrupt in this space all the time. For instance:
- Conseco holding company went bankrupt - but its insurance subsidiaries continued operating without any bankruptcy filing.
- A long while ago Baldwin United went bankrupt - but its subsidiary (Ambac would you believe) maintained its AAA rating
- More recently Fremont General had two businesses - an insurance business and a dodgy lender. The insurance subsidiary went bankrupt - but it took several years for the dodgy lender to catch up with them.
Its a very painful task to do it - and somehow I doubt Moodys have done it properly either. But Mish just dismisses this as a necessary part of the analysis - and in that Mish is wrong.
General disclaimer
The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.