Thursday, June 19, 2008

I'll come right back and give you a hand!

Bill Ackman has gone long FSA CDS, in effect betting that FSA will go bankrupt. Its moved 200bps wider today (now 645/695). I want to write a detailed post comparing FSA, Ambac, and MBIA, so that's coming. But in the mean time, does anyone have anything more detailed on Ackman's case against FSA? If so, e-mail me: accruedint at

Ackman was obviously right about MBIA, but I have long contended that he's been getting too much credit for calling MBIA early. Some readers may remember he was short MBIA at Gotham Partners going all the way back to 2002, before MBIA was heavily involved in the shit that ultimately dragged them down. Don't get me wrong, kudos for him for all the money he's made on MBIA. I just bristle when I hear something like "he's been right about MBIA since 2002." His thesis from 2002 was wrong. His thesis in 2007 was dead on.

In other news, I've been contemplating some upgrades to the site, one of which would be to start using labels. Vote in the latest poll if this interests you.


Gringcorp said...

This move does fascinate me. Ackman going short MBIA and Ambac was him betting, awesomely well, that the big two were letting standards slip in pursuit of new business volumes. Betting against FSA - the conservative one - is his way of saying no monoline is safe. Note, though, that FSA isn't publicly traded and its owner is a large and rich conservative French public finance bank. But then again, so are CIFG's owners. He might just be assuming that more bad news from MBIA and Ambac, which is highly possible, would send all the monolines' CDS higher.

Anonymous said...

Does anyone on this blog know of a source to get indicative swaption volatilities if you don't have access to a Bloomberg? end of day, indicative is plenty adequate -- I just want to follow major trends on callable debt

The Fed offers a lot of this sort of info -- but unfortunately not swaption vols.

Any ideas?

Superbear said...

Not sure I agree with your viewpoint. His thesis was right all along, but timing might have been a little early.

I had shorted WM, TMA, NEW, CFC, C, WFC, LEH, BSC etc. an year ago (March-June 2007). I was wrong for 6 months and used it to add to short positions. 6 months after that, it seems like a good decision.

The point is that you can't bet on price and timeframe. You bet on one, and hedge the other. Hopefully, in that process you'll make some money.

Accrued Interest said...

Yes but the reason why MBIA ultimately went down wasn't present in 2002. It isn't like they were doing tons of subprime business in 2002 and it just took time for it to catch up with them.

Anonymous said...

I agree very much with your statement regarding his thesis in 2002. Not to take anything away from his diligence and fortitude for sticking with his guns but if I could short oil for the next 5 years, adding to my positions as it goes against me, using other peoples money and still being paid an exorbitant salary, would I too be placed in the same category as a Bill Ackman or Paulson or even a Soros? Let me know cause I'll start scratching together a few Bill....

JoshK said...

Sorry, just regarding labels:

I think they would be helpful sometimes, as long as it's not overkill.

Accrued Interest said...

Maybe he saw something at the culture or some such and he was willing to bet that eventually they'd get in over their heads. Who knows. But if you go back and read what he actually argued back in 2002, those points didn't really play out. He might have mentioned too much leverage, but honestly, had MBIA just kept to what they were doing in 2002, they'd still be AAA!

Sivaram V said...

(disclosure: long Ambac :( )

Ackman was wrong with his original thesis. He initially claimed that bond insurance doesn't make any sense and was claiming the leverage was too high. He was talking primarily about muni bond insurance back then (mortgage bonds weren't a big part of the industry back then.) He also claimed that bond insurers can't charge below market spreads (hence capturing the difference for themselves) because the market is always right. The fact that Berkshire entered the market, and others like Macquarie and considering, means that he is wrong and bond insurance is actually viable. So his main points from back then were completely wrong. The only reason he survived with his short position was because he used CDS, which seems to have been underpriced back then (nearly all risk was).

Where Ackman was right was with his expectation of huge losses on second-lien exposure (HELOC and CES). I think the monolines, as well as shareholders like myself, totally under-estimated the potential for huge losses on that. As for direct RMBS and CDOs, the verdict is still uncertain. The stock market and the bond market is expecting massive losses but it will come down to actual realized losses.

William Ackman should be credited for his contrarian and gutsy bet. However, his original thesis turned out to be wrong. This is similar to Carl Icahan's investment in Motorola. Icahan claimed that Motorola needed to reward shareholders more a few years ago when its products (particularly RAZR) were still strong. But his thesis for investing turned out be completely wrong because the product totally fell off a cliff and Motorola ended up with massive losses. Icahan is suggesting changes for Motorola right now but these are totally different from before. His original investment thesis was completely wrong. I'm not equating William Ackman with Carl Icahan (they are not the same and have different investing styles) but the point is that Ackman's original thesis for betting against MBIA actually turned out to be wrong.

As for Ackman's bet against FSA, I don't have any access to what he was saying (only the public news stories), but it seems that he isn't necessarily concerned with FSA's insurance underwriting. Instead, Ackman is bearish because of FSA's investment portfolio (this has nothing to do with bond insurance per se). The assets in the portfolio seem to have declined and Ackman claims that liabilities exceed assets by several billion.

Anyway, that's just my non-professional opinion. Hopefully someone will post Ackman's presentation somewhere...

Gringcorp said...

I had another little think overnight (I like to speculate about the monolines, but don't claim to be privy to anything special). Ackman, despite being publicly critical of the way the agencies rate the monolines, knows that what they do has a very large impact on his positions. Remember, the monoline fundraisings from the start of the year were meant to take care of the damage from a few truly awful CDOs-squared and other over-leveraged creations, which hit MBIA, Ambac, FGIC, and XL more than they did FSA and AGO. S&P and Moody's are saying, with their recent downgrades, that capital raising will not be enough to take care of what they see as horrible losses in RMBS tranches. In other words, all of their structured finance could go rotten, and not just a few bad apples.

Anonymous said...

Ackman was on to the problems with MBIA much earlier than you will admit. The following is from a July 2003 Fortune article: (Ackman was with Gotham Partners)

"But the business has changed over the years, and of late MBIA has made a significant foray into guarantees on nonmunicipal paper. This is where Gotham sees trouble brewing.

The nonmuni stuff is all over the lot. Some is backed by receivables from outfits like credit card issuers Metris and Providian, not known for their sterling finances. A lot of it is from stable credits like Citigroup and Wells Fargo.

One kind of MBIA financial insurance starts with a pool of debt assets, like corporate bonds or loans. An investment bank, for example, funds the pool by issuing different tiers of securities ranging in safety from a very junior, equity-like tranche (first to take a hit if the companies don't pay back their debt) up to a safe, senior tranche (last to take a hit). MBIA generally insures senior tranches against default. It has guarantees outstanding on $21 billion of debt obligations of this sort."

I watched with wonder over the last year as people argued whether MBIA and Ambac deserved their triple-A ratings. As far as I'm concerned, people should be wondering about their survival.

Each of them has gotten approximately one third of their revenue over the last few years from structured finance, and two thirds from insuring municipal bonds. What are their prospects going forward?

The structured finance business is gone. Therefore, they're left with a potential two thirds of their previous revenue. In the past, about half of all municipal bonds came with insurance. Today, that's down to 25%. Therefore, they're down to half of their two thirds, or one third of their previous revenue.

And even that business is going to be last. Once the various regulators get through with the rating agencies, they're going to be giving triple-A ratings to about 75% of all issuances. An estimated 10-15% of issuances will then need insurance.

And where will MBIA and Ambac be? What issuer in their right mind will choose a less than AAA rated insurer when Berkshire Hathaway and other triple A's are available?

They will likely end up a shell of their former selves, with premiums in the 5-10% of the period 2000-2005. At that point, they would be taken over by the regulators, and the business run off.

Anonymous said...

Once the various regulators get through with the rating agencies, they're going to be giving triple-A ratings to about 75% of all issuances. An estimated 10-15% of issuances will then need insurance.

That's what the grandstanding politicians would have us believe, but I'm not convinced that this is the case.

The thesis is that once the scales are unified and all the AAA/AA/A munis are rated AAA, then they will all start trading at yields reflective of current AAAs.

I've never seen an explanation of why this should be the case. Why won't they all start trading at the current levels of "A" munis, due to the lemons problem? If this is what eventually happens, then this market will (well ... should) bifurcate: AAA munis with AAA insurance and AAA munis without AAA insurance. As long as the market yield spread is greater than the cost of insurance for a sufficient proportion of the AAA municipal issuers, bond insurance will be viable.

If this scenario plays out, then municipalities that are currently top-rated will see their costs increase, as they will be forced to address a lemons problem that does not now exist. Be careful what you wish for!

Will this happen? I don't know. Perhaps the politicians and regulators are actually, this time, leading us to the promised land. Better Living through More Rules! But maybe they're not.

Anonymous said...

It isn't like they were doing tons of subprime business in 2002 and it just took time for it to catch up with them.

Uh, AI, wasn't that exactly the case? As long as borrowers could sell or re-fi the music played on...

Anonymous said...


when reading MBIA 5y CDS quoted as 5% p.a and 38.5% upfront, is it correct to recalculate and say that the cost of insring MBIA debt is 12.70% pa? (i.e. 38.5% divided by 5years and add that to 5% p.a.)


Anonymous said...

Has anyone found a copy of the presentation or a video of the presentation Ackman provided at the Jones Day conference? I have been trying to find it but have not had any luck.

Accrued Interest said...

It is ABS CDOs and CDO^2 that are sinking MBIA right now. Not the asset-backed bonds that Ackman was talking about in 2002. On CLOs, while the prices have certainly dropped, the loss rates are well within historic norms. Some believe the loss rates are on the way up, but even so, you have to admit that it isn't CLOs that is causing MBIA problems right now.

That's all I'm saying. Ackman argued that MBIA was backing questionable receivables deals back then. Those deals worked out fine. The ABS CDO fad didn't really get going until more like 2005.

Accrued Interest said...

I'm not defending MBIA or Ambac, by the way, just saying that the things that are destroying them are more recent deal types, not stuff they were doing in 2002. Again, to be fair to Ackman, maybe he saw that their credit work was sloppy and figured that eventually that would catch up with them.

But what he said was these credit card deals were crap. And they weren't.

Anonymous said...

In other news, I've been contemplating some upgrades to the site, one of which would be to start using labels. Vote in the latest poll if this interests you.

Once again, I am forced to admit total ignorance: what is a label?

Anonymous said...

FSA differs from Ambac and MBIA in that its parent, Dexia, is a bank and one of the 10 largest banking groups in the world. Dexia wasn't about to waste any time responding to Ackman's presentation. The $5 billion letter of credit with a term of 5 years that was made 2 days after Ackman's statements shows it's not going to put in jeopardy its AAA rating.