iOS app Android app More

James Berman

James Berman

Posted: January 14, 2008 11:08 AM

MBIA or Bust


The definition of a market is a buyer for every seller, so it's not unusual that people view stocks differently. But when two acclaimed investors dig in their well-worn heels on opposite ends of the same position--in a very public way--it makes for a story. Marty Whitman, the no-nonsense, legendary value investor, owns the shares of insurer MBIA, while Bill Ackman, a successful and swashbuckling hedge fund manager is betting against them with a short position.

MBIA is the controversial stock du jour. As one of the largest bond guarantors, MBIA has the unenviable task of insuring many of the exotic derivatives that are collapsing under the mortgage mess. Much of the controversy surrounds the write-offs that MBIA has taken (and will continue to take) for expected losses. On the one hand, there's no doubt that the collapse in CDO's will lead to real claims payments by MBIA--claims that could conceivably lead to bankruptcy. On the other hand, the insurer argues that derivative marks-to-market may overstate the eventual damage.

So far, Ackman is the winner in this high stakes financial superbowl. MBIA has lost nearly 80% of its value over the past year, and Ackman's bet has paid off handsomely for investors in his hedge fund, Pershing Square. Whitman has been buying MBIA all the way down in his Third Avenue Value Fund, losing on the position thus far. Both my clients and myself own positions in Whitman's fund, so I'm not exactly a disinterested observer.

Recently, the fight has gotten merciless, with Whitman saying on CNBC that Ackman "is a slick salesman who doesn't know much about insurance." These are strong words, especially for someone on the losing end of a massive trade. But Whitman is a long-term value investor who doesn't give much credence to the short term--and he's earned the right to tough talk through an exceptional and lengthy performance record. He points out that MBIA will only owe money on claims eventually paid, not marks-to-market, which gives it the luxury of raising capital to bolster its reserves. Indeed, Warburg Pincus has committed substantial funds to MBIA, a decision they may now regret. MBIA also just sold $1 billion in surplus notes which carry a 14% coupon. So the company is still able to raise money, if only at "junk" interest rates.

Ackman said recently on Bloomberg that he's increasing his short position and contemplates the possibility of an MBIA bankruptcy by year-end. He has also pledged his personal winnings to charity, which presumably gives him the claim to any karma. Ackman maintains that CDO quotes are rational (an interesting position, by the way, for someone who makes his substantial living by spotting irrational market prices) and foreshadow MBIA's future misery. If Ackman had covered his short position now, it would potentially allow both to claim victory: Ackman would have made money on the decline, while Whitman could still win with any eventual resurgence in the shares. By increasing his bet now, however, Ackman has made this a fight to the last dollar.

One market player long, the other short. One predicting long-term gains, the other a short-term bust. For market mano-a-mano's, it doesn't get better than this.