NEW YORK (Reuters) - Bill Ackman, whose hedge fund has been betting
against bond insurers since at least 2002, said in a letter to U.S.
regulators that rescuing the bond insurers will only prolong the credit
crisis, and the companies should instead be allowed to fail.
In the letter obtained by Reuters, Ackman said bond insurers in
recent years have become a means for banks to avoid reporting their
full credit exposure and make their capital ratios appear stronger, but
that banks should be forced to own up to their full credit risk.
"(W)e understand that the banking industry counterparties to the
bond insurers would prefer to avoid taking these ... risks back on
balance sheet -- particularly at a time when their balance sheets are
strained by subprime and other losses that have not been hedged,"
Ackman wrote, adding that "there are no such free lunches available in
the capital markets."
Bond insurers have in turn been critical of Ackman and other
investors betting against the companies. On a recent conference call,
MBIA Inc (MBI.N: Quote, Profile, Research)
Chief Executive Gary Dunton railed against "the fear mongering and
intentional distortions of facts about our business that have been
pumped into the market by self-interested parties."
New York State Superintendent Eric Dinallo is working with banks to
rescue bond insurers including Ambac Financial Group Inc (ABK.N: Quote, Profile, Research)
and FGIC Corp, which face billions of dollars of potential losses after
guaranteeing bonds linked to risky subprime mortgages and other debt.
One idea floated by Dinallo early in discussions was banks putting
up a rescue fund of about $15 billion to save the insurers, according
to a person briefed on the matter. That idea has now given way to
separate rescues of the companies, which collectively guarantee more
than $2.4 trillion of bonds.
But some analysts argue a rescue will take a lot more than $15
billion. Sean Egan, managing director of independent credit rating firm
Egan-Jones Ratings Inc, says the top six bond insurers face roughly $80
billion of eventual losses, and probably need more than $200 billion of
new capital.
Ackman said in his letter that given the eventual losses the bond
insurers face, banks that have traded with the companies should write
down their exposure today and raise enough new capital so they can
continue to operate safely.
Banks and bond insurers should be forced to disclose their exposure
to repackaged bonds and loans known as collateralized debt obligations
immediately, Ackman added in the letter, which was addressed to Federal
Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and
others.
Ackman is founder of Pershing Square Capital Management, which has
sold shares of Ambac and MBIA short in a bet they will decline.
Pershing Square manages some $6 billion. In addition to these short
positions, the company also buys shares of companies and agitates for
change, as at McDonald's Corp and Wendy's.
THE INSURERS' CASSANDRA
Investors for years ignored bearish analysts like Ackman, and
instead sent shares of bond insurers like Ambac and MBIA Inc to record
levels as recently as the beginning of 2007.
But investors have become much more open to Ackman's arguments in
recent months as bond insurers have reported billions of dollars of
payouts, posted quarterly losses that eroded a substantial portion of
their net worth, and edged closer to losing top ratings crucial for
their business.
If U.S. bond insurers lose their top ratings, global financial
markets could be hurt. Investors that can only hold top-rated bonds
will be forced to sell them, while banks will be forced to record
losses that some analysts estimate at $70 billion or more.
Bond insurers originally focused on guaranteeing municipal bonds
against default. Tax-free bonds issued by cities, states, and other
government entities rarely default, which meant that bond insurers
rarely had to make payouts, and could maintain fairly low levels of
capital relative to their exposure.
But in the last decade, the insurers have sought higher returns by
guaranteeing repackaged subprime mortgages and other risk assets
against default, which turned out to be a losing bet after housing
prices stopped rising, borrower defaults jumped and credit markets went
into a tailspin.
(Reporting by Dan Wilchins)
Copyright
Reuters 2008. All rights reserved. Users may download and print extracts of
content from this website for their own personal and non-commercial use only.
Republication or redistribution of Reuters content, including by framing or
similar means, is expressly prohibited without the prior written consent of
Reuters. Reuters and the Reuters sphere logo are registered trademarks or
trademarks of the Reuters group of companies around the world.
