Monoline Death Watch: California Sells Big Unisured Issue; Marty Whitman Sounds Off

The bond insurers increasingly remind me of creatures that are a fixture of horror movies, the sort that occupy a special niche between alive and dead. Inevitably, they pose a danger to humans and prove vexingly difficult to kill.

Today, the equity markets, which were in a nasty funk, chippered up and regained most of their losses on a CNBC report shortly before the close that Ambac was on the verge of reaching a fundraising deal. I’m not sure this qualifies as news; it’s been rumored for a week or so that eight investment banks had indicated a willingness to backstop a $2.5 billion equity fundraising. Unless the structure of the deal has changed, this plan has been widely leaked.

And speaking of leaks, this is the second time that CNBC has done Ambac and the markets the favor of putting out a news story in the last half hour of trading. This smells to high heaven. The first time, it looked very much like a deliberate evasion of NYSE trading rules that require companies to call a trading halt if they are announcing significant news during the trading day. And the fact that it’s happened a second time, in parallel fashion, is telling. If the first time had really been a leak, there should have been a full bore effort by Ambac to find out who the source was, or at least terrorize all informed parties so it wouldn’t happen again. That clearly did not happen.

These end of day media plants look like a ploy to kill the shorts in Ambac stock. But in our “anything goes” regulatory environment, no one is going to subject Ambac’s apparent market manipulation to the scrutiny it deserves.

Regardless, these fundraisings are merely a short-term bailing operation. Unless the underlying business gets on a solid footing, the days for these firms are numbered (although per our starting thought, they will probably linger on for an unseemly amount of time).

The prospects for the muni bond insurance business look worse and worse with every passing day. Warren Buffett, with his unquestioned AAA, will cherry-pick the best deals. And there now is risk in the market, thanks to the perfect storm of underlying revenue weakness due to housing market stress and a softening economy, compounded by the sizable, unexpected costs for those issuers hit by auction rate bond failures. A market that was once virtually risk free is now perilous.

A further blow is that the monolines’ woes and the auction rate securities crisis has made many muncipalities realize that the insurance is a bad buy and they’d be better off going on their own.

California did so on Tuesday, launching a $1.75 billion bond issue with no insurance (the state is rated A+) which saw record demand. Admittedly, because the size of its deals are large, California bonds are particularly liquid, which reduces some of the risk of buying them. And the unusually rich yields on offer were compelling.

While this is not the first time that California has sold uninsured bonds, states and localities looking to replace hung ARS deals are scrambling to sell longer-term debt. As the first big deal since the auction rate crisis hit, the California sale is a bellwether. Its success will make it easier for other municipal issuers to forego bond guarantees.

From Bloomberg:

California, the largest borrower in the U.S. municipal market, sold $1.75 billion of bonds after attracting record demand from individuals drawn to the highest tax-exempt yields in more than three years.

The state received orders from more than 4,000 investors equal to over 72 percent of the bonds available, said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. Officials, who were to complete the sale tomorrow, wrapped it up early by selling the rest of the debt to institutions….

California, with the second-lowest credit ratings among U.S. states after Louisiana, sold bonds today at yields ranging from 2.85 percent on debt due in two years to 5.40 percent on securities maturing in 2038. The state’s underwriters, led by Siebert Brandford Shank & Co., were able to raise prices and cut yields by as much as 24 basis points from yesterday’s preliminary rates.

For at least the third time in four months, California didn’t buy insurance against default for its bonds. “At this point and time, given the market and the situation with insurers, insurance has no value to taxpayers,” Dresslar said. “Until and unless the market assigns value to it again and it makes financial sense again for taxpayers, we are not going to buy insurance.”

The other news development of the day was that distressed investor Marty Whitman increased his stake in number one bond insurer MBIA to 10% and issued a testy letter to his investors:

MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business. However, there seem to be three impediments tangential to capitalization that might prevent MBIA from receiving a credit rating of AAA-Stable.

1) The Credit Rating Agencies could be arbitrary and capricious….

2) MBIA is New York State domiciled…. The state leadership including the Governor of New York, Elliott Spitzer, appears not to fully appreciate the financial strength of issuers such as MBIA….

3) As has been well reported by the financial media, MBIA is being victimized by an apparently wellorganized bear raid headed by William Ackman (”Ackman”) of Pershing Square Capital Management….

Per above, we doubt there is as much profitable business to be written as Whitman thinks. Furthermore, the idea that MBIA is “victimzed” by Ackman is laughable. Public companies have vastly more resources to bring to bear (no pun intended) that a “well-organized” hedge fund operator. They’ve had years to make their case and have failed miserably.

Jonathan Weil at Bloomberg also has little sympathy. In “AIG, MBIA Show Whining Back in Vogue,” he notes:

Ambac recorded $5.2 billion in mark-to-market losses on credit swaps for the fourth quarter. It stressed that just $1.1 billion of that was for impairments on CDOs where Ambac believes it “will have to make claim payments” in the future.

MBIA, which like Ambac is struggling to keep its AAA credit rating, had $3.4 billion in similar markdowns last quarter, though its losses didn’t deter value investor Martin Whitman from upping his stake in MBIA recently to 10 percent. In a March 3 letter to shareholders, MBIA said these “are not predictive of future claims and, absent further credit impairment, will totally reverse over time.”

Perhaps they are right, which is another way of saying maybe the market is wrong and that it’s just a matter of time before the rest of the world figures out how much smarter these companies’ executives are than the rest of us.

Investors can choose for themselves what to believe. At least they were warned.

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  1. Ginger Yellow

    “Public companies have vastly more resources to bring to bear (no pun intended) that a “well-organized” hedge fund operator. They’ve had years to make their case and have failed miserably.”

    That’s all true, but at the same time, pretty much everything Ackman has said and done over the last few months has been intended to kill the monolines. His testimony to Cognress was entirely self-interested.

  2. Anonymous

    AMBAC and MBIA execs testimony can be assumed to be entirely disinterested, I guess. Ken Lay’s statements that ENE was brought down by a “bear raid” can also be taken at face value, since he is a corporate executive, which I believe is by definition a much higher class of individual than some hedgie.

  3. Anonymous

    Thanks, Yves, for pointing out CNBC’s Tuesday leak affecting the market. I was livid when I read that and saw the market’s up response. And the leak was not obviously posted on CNBC or anywhere – I only saw it mentioned on Yahoo’s Finance Market Overview. (Interestingly, earlier Tuesday I noted no update posts on the YFMO webpage for nearly 2 and a half hours – Jeez!)

    The Invisible Hand has many tenacles, eh? It also shows how vulnerable we are to an Orson Welles-type media event ending in financial bliss or chaos, especially when you realize there is an infinite source of Orson Welles-types sources (i.e. CNBC, etc.) out there.

    God help us all. Thanks for your great website/blog.

    Steve B.
    STL, MO

  4. Anonymous

    The chance of fundamental value investor Marty Whitman being wrong is extremely small. Ackman is a short. He has an agenda. Whitman probably understands this company better than anybody and he has no reason to lie.

  5. Ginger Yellow

    “AMBAC and MBIA execs testimony can be assumed to be entirely disinterested, I guess. “

    Did I say that? Of course the monolines are going to talk up their business. The point is that Ackman wins if the monolines go under. Even if he’s right about their financial position, and he has been so far, there’s no reason whatsoever to listen to his proposals for a solution. His interests are diametrically opposed to those of most of the country, indeed the world.

  6. max

    The point is that Ackman wins if the monolines go under. Even if he’s right about their financial position, and he has been so far, there’s no reason whatsoever to listen to his proposals for a solution. His interests are diametrically opposed to those of most of the country, indeed the world.

    Monolines, together with the rating agencies, business is a scam, and every municipality is waking up to the fact. Defaults on munis are orders of magnitude lower than on corporate “AAA” paper, there virtually is nothing to insure against. The trash CDOs were rated AAA, and every pension fund bought those, but the low-risk munis need insurance? Ackman is right, and his interests are in line with the rest of the country, and every town in it.

  7. Yves Smith

    Ackman has no interest in seeing the monoline’s insurnace subsidiaries fail; his attack is on the holding companies, which have been getting dividends from the insurance subs even though they have been posting losses.

    Very few of Ackman’s critics have read what he has written. He has repeatedly given regulators proposals about what to do to protect the insured subs.

    Moreover, investors who have been on the monolines’ conference calls for years have written to tell me that the stories that have appeared in the press, with specifics as to what the ratings agencies said in private to the companies, show them to have been liars. That is probably a big part of why the market have been down on them; they’ve shown they aren’t truthful.

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