By Vikas Bajaj and Julie Creswell
Published: January 31, 2008
International Herald Tribune
While the U.S. Federal Reserve Board tried to soothe Wall Street's nerves Wednesday, a hedge fund manager frayed them by warning that two pillars of the financial markets might crumble.
Even as the Fed delivered another big cut in interest rates, William Ackman, a prominent money manager, fanned growing fears that the bond insurance industry might suffer crippling losses.
Ackman, who runs a New York hedge fund called Pershing Square and has bet against the insurers' shares, issued a report late Wednesday afternoon predicting that two of the companies, MBIA and the Ambac Financial Group, might lose $24 billion on complex mortgage investments they have guaranteed. Such a hole might threaten their survival and touch off a chain reaction of losses at some of Wall Street's biggest banks, as well as raise borrowing costs for states and municipalities.
His report, along with the downgrading of a smaller bond guarantor, helped quash a rally in stocks caused by the Fed's rate cut. The Standard & Poor's 500-stock index closed down 0.5 percent after being up by as much as 1.7 percent an hour before the close. Shares of financial services stocks fell about 1.1 percent.
"Here comes Ackman at the 11th hour upsetting the apple cart," said Douglas Peta, chief market strategist at J.& W. Seligman & Co. "I don't think anybody has really thought it all through, but we all understand the implications of real trouble in the bond insurers could be far reaching."
Together MBIA and Ambac guarantee more than $1 trillion in municipal, corporate and mortgage debt and carry a mark of distinction — a triple-A credit rating — a boast that even the most well-heeled of corporations like IBM cannot make.
Ratings agencies like S&P and Moody's Investors Service have said they are considering downgrading the insurers because the companies may not have enough capital to pay claims on future losses in the complex mortgage-related investments they have insured.
At the same time, insurance regulators hope to head off the downgradings by persuading Wall Street banks to inject capital into the companies or provide them with backup lines of credit.
Highlighting the uncertainty facing the insurers and regulators, S&P said Wednesday that it had already downgraded or was considering reducing the rating on more than half a trillion dollars of mortgage securities. These are the kind of investments that MBIA and Ambac have insured and are required to make interest and principal payments on if homeowners default and their homes are sold at a loss.
For their part, MBIA and Ambac have argued that concerns about their viability, let alone their triple-A rating, are overblown. They say defaults will not be high enough that they would suffer significant losses, and even then they say the claims would be minimal and have to be paid over years, not right away.
MBIA, which was scheduled to report fourth-quarter earnings after the market closed, said late Wednesday that it had secured $500 million in capital from Warburg Pincus, the private equity firm, as part of a previously announced $1 billion investment. The company also added two representatives from Warburg Pincus to its board and said an executive from Deutsche Bank would be leaving the board.
Investors in the stock market appear to have little faith in the insurers. Shares of MBIA and Ambac have plunged more than 80 percent in the last 12 months.
On Wednesday, Ackman released detailed estimates for losses on mortgage securities guaranteed by MBIA and Ambac, saying the estimates were based on conservative assumptions. He said the data, which he released online so it could be analyzed by other investors, would give lie to the companies' assertions that they only insured safe securities.
"Now it's a level playing field," Ackman said in a telephone interview. "We are putting it out there and we are saying don't rely on us. Do your own work. Here is the data that you can use."
In a letter addressed to insurance regulators and the U.S. Securities and Exchange Commission, he said that he received details of the bonds that the two companies had insured from an unidentified "global bank."
Ackman said the bank, which he said he believes also has bearish positions on the insurers, gathered the data from publicly available sources that included the companies' financial statements and regulatory filings.
MBIA declined to comment and Ambac did not return a telephone call.
Fitch Ratings, meanwhile, downgraded another insurer, the Financial Guarantee Insurance Company, to double-A, from triple-A, after the company failed to meet a deadline to raise $1 billion in new capital. The loss of the rating will make it harder for the company to write new insurance policies.

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