Wednesday, January 30, 2008

Ackman and the monolines

William Ackman sent a 20 page letter regarding the bond insurers to the rating agencies; to Moody's, FGIC, and S&P, to the SEC, our heads of banking in the House and Senate, the insurance commisioners, the head of the Big 4 accounting firms-PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte and Touche, the AG's of NY, Connecticut and Idaho, the Bermuda Monetary Authority, and Chairman Bernanke! You can read it here:

http://www.yousendit.com/transfer.php?action=batch_download&batch_id=Mmd0UXVuQzMzeUxIRGc9PQ=

It begins with this:

"In an attempt to improve the level of discourse in the marketplace regarding potential losses in the bond insurance industry, we are releasing today a dynamic financial model (the "Open Source Model") that contains extensive detail on the precise CDO and related January 30, 2008 exposures of the insurance operating subsidiaries of both MBIA and Ambac...

In order to facilitate a comprehensive and accurate estimate of probable losses in the bond insurers’ exposures, we believe that you, as their regulators, must require the bond insurance companies to provide full disclosure to the market of their entire portfolio of insured exposures. This should include not only confirmatory data on CDO and related RMBS exposures detailed in the Open Source Model, but also municipal and other structured finance exposures, especially those exposures that have been or are in remediation, are rated below-investment grade, require claim payments or otherwise have been or are carried on so-called "classified watch lists." Additionally, companies must disclose which exposures have been reinsured along with the names and specific exposures of their reinsurance counterparties. Only with a complete understanding of all of the bond insurers’ gross exposures to potential losses can the market gain a complete understanding of the insurers’ capital adequacy...

Under the assumptions used in the Open Source Model, the losses to MBIA and Ambac from these exposures are materially higher than suggested by the rating agencies or the bond insurers themselves....

Ambac will incur approximately $11.61 billion of losses on its net RMBS and ABS CDO exposures...

MBIA will incur approximately $11.63 billion of losses on its net RMBS and ABS CDO exposures and $12.56 billion of losses if one reincorporates certain 2007 CDOs of ABS that have been reinsured....

The market’s loss of confidence in the bond insurers’ creditworthiness will make these loss postponement transactions more difficult (and likely impossible) in the future. Accordingly, we believe that historically low default rates for non-general obligation, muni-related bonds understate the level of losses that will be sustained on a going-forward basis. We expect, therefore, that non-taxpayer supported municipal finance will begin to generate material losses in the future....

Lastly on the subject of transparency, MBIA’s fourth quarter conference call scheduled for tomorrow will be "listen only" and will not allow live questions from analysts and investors. The company will only answer questions it selects from those submitted by email in advance of the call. This is a further reduction in transparency to the markets from MBIA’s typical earnings call where a select group of analysts and investors are screened and then permitted to ask questions. We intend to release the list of questions we email to MBIA to the public. We believe these questions will assist the markets in understanding the company. If the company thereafter chooses not to answer these questions, its silence will speak for itself...

Please note that Pershing manages funds that are in the business of trading – buying and selling – securities and credit default swaps. While Pershing currently maintains a net short position in MBIA Inc. and Ambac Financial Group and may have other positions in the industry, Pershing may change its position regarding the companies and possibly increase, decrease, dispose of, or change the form of its investment in the companies for any or no reason.

PERSHING SQUARE CAPITAL MANAGEMENT, L.P.
Respectfully submitted,
William A. Ackman"


I heard whispers of this letter this morning. Today I wrote about monolines, and the Fed, as I thought that would be the story. It was. Meredith Whitney had the opening salvo of which I put on this blog. Charlie Gaspraino fired the next shot on CNBC, after the Fed cut when the market had rallied almost 200 points off of it's lows, warning of rating downgrades for the monolines. Fitch then cut the ratings of FGIC before the close. S&P then put $270 billion of securities on ratings watch after the bell. Tomorrow, Ackman releases his questions and probably this letter.

So here's your heads up!

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