Hedge Fund Betting MBI and ABK go B/KFrom NYT
https://dealbook.blogs.nytimes.com/2007/11/28/shorting-bond-insurers-for-charity/
Shorting Bond Insurers for Charity
November 28, 2007, 6:12 pm
William Ackman has never lacked for confidence in his bets on companies like Target and McDonald’s. Now, he seems so assured of his bet against bond insurers that he says he will donate the more than $500 million he expects to earn from those short positions to charity.
Mr. Ackman, who heads Pershing Square Capital Management, told the Value Investing Congress that he expects the holding companies of MBIA and Ambac Financial, the two largest bond insurers, to fail as soon as next year. He said he stands to gain about $500 million if MBIA fails, and his hedge fund several billions of dollars if both fail. (His personal gains would go to the Pershing Square Foundation, he said.)
“We’re short the holding companies because we think they’ll run out of cash and go bankrupt,” Mr. Ackman, who first criticized MBIA in a 2002 report, told Bloomberg News. “What I said at the time to regulators and anyone who would listen is that this is a problem now, but it’s going to be a bigger problem later.”
Shares of bond insurers have plummeted this year in the wake of the subprime mortgage crisis. In recent years, those companies diversified beyond their traditional duties — guaranteeing the issues of municipal bonds for state governments — to backing riskier structured mortgage products like collateralized debt obligations. As the value of such instruments has plummeted, that has left companies like Ambac and MBIA on the hook for billions of dollars that they do not have.
Now the three major ratings agencies are examining the companies’ capital reserves. If they are found insufficient, the agencies could downgrade MBIA and Ambac’s sterling credit ratings — a potentially disastrous event.
Separately, Fortune points out that two other victims of a potential bond insurer crash are Barclays and the Canadian Imperial Bank of Commerce. Both rushed to guarantee bond insurers in C.D.O.’s. If Mr. Ackman’s predictions of $5 billion to $6 billion in losses for those firms comes true, both Barclays and CIBC could face yet more subprime-related pain.