Sunday, August 3, 2008

The monoline holders speak

We've heard all the screaming from the shorts on the monolines. Now it's time for something from the long holders of Ambac Financial (ABK 3.79) and MBIA (MBI 7.67).

From the Davis Funds:

Having said this, the histories of Ambac and its competitor MBIA, whose shares we added at the end of the fourth quarter, are not yet written and many aspects of their business remain very valuable. In times of great dislocation, strange things can happen. During the Enron saga, for example, shares of Williams Companies fell from a high of $49 to less than $1, only to trade at $32 today. Similarly, another energy company, AES, fell to as low as 92 cents only to recover to $19 today. Please know we are studying Ambac and MBIA carefully. Both situations are fluid and could change rapidly.

From Evercore Asset Management:

All of this is not to say that we believe there will be no additional reserves. It seems only prudent to hypothesize that something will spring a leak somewhere, perhaps because of the macro economic environment. For each company we are assuming the need for additional reserves of approximately $2-$3 billion will become necessary, most likely from the Alt-A and prime books embedded within the CDOs.

Rather, what we are saying is that losses of this magnitude are manageable and will leave the equity holder with adjusted book values of approximately $23 per share in the case of ABK and $40 per share in the case of MBI. Put another way, implicit in the current stock prices are additional pretax losses of $13.0 billion for ABK and $15.5 billion for MBI; we just don’t see that as being at all likely.

..the bears (primarily hedge funds with bearish positions of one kind or another) continue to attack the companies relentlessly. Most recently, they have argued that the downgrades would trigger a liquidity crisis within the company’s asset management businesses as a result of collateral posting requirements and account terminations triggered by the new ratings. We’ve never believed that would be an issue, contending instead that the portfolios these companies managed were comprised of relatively safe and fairly liquid investments that, if need be, could either be posted as the collateral or liquidated to generate cash which could then be posted. MBI, in fact, did just that, and its portfolios are now 100% collateralized. We believe ABK is on a path to achieve the same outcome in the near future...

Next week goes to the bulls.

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