MBIA, Ambac Fall as Buffett Starts Up Bond Insurer

R

Retired

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDdMwdVFSiok&refer=home

Dec. 28 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt.

Ambac dropped as much 15 percent, the most in two months, and MBIA fell as much as 17 percent after Buffett's Berkshire Hathaway Inc. said it plans to insure bonds in New York and at least four other states.

Berkshire, which gets half its profit from insurance, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee about $1.2 trillion of municipal bonds. MBIA, Ambac and other guarantors are under scrutiny amid concern they don't have enough capital set aside to cover potential losses on bonds they insure that are linked to subprime mortgages.

``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. Bond insurers ``are hurting, so now is a good time for Buffett to be getting into the market.''

Buffett, 77, said in an interview today on News Corp.'s Fox Business Network that it will be easier to break into the bond insurance market now than it would've been a couple of years ago because rivals are facing pressure on their ratings. He told the Wall Street Journal that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. Jackie Wilson, a spokeswoman for Omaha, Nebraska-based Berkshire, confirmed Buffett's plans.
 
I think MBI and ABK are doomed for the following reasons:

1. MBI and ABK generate most of the revenue off muni's.
2. Munis are worried over MBI and ABK recent bouts with the ratings agencies but there is nowhere else to go for insurance.
3. Munis will turn to Buffet.
4. No one will inject capital to bet against the Oracle.
5. S&P, Moody's and Fitch must downgrade ABK and MBI.
6. ABK and MBI are left only insuring the risky financials and end up under-capitalized without the safe muni revenue.
7. The financials that rely heavily upon the insurance will be left uninsured and take big hits on their portfolios.

This Buffet news is arguably the worst news to hit the financials in months.
 
the drop was rather ridiculous. It is already a very competitive market with many players. One more not going to make a diference. More importantly, Buffett operatin is very small with only $160 million investment and ony liscensed in one state. ABK and MBIA are already cutting back to preserve capital and reinsuring past business. Not having enough business is not the issue with these companies. I don't know if ABK or MBI are good buys, but they should not have dropped more than 10 cents on the Buffett news. If anything it was positive as it stabilizes the perception of AAA bond insurance for Muni's.
 
ABK was affirmed AAA with stable outlook by s&p. They have $55 in book value and another $30 in unearned premiums set to come in. My understanding is that they could just shut down and go into runoff and investors could get their money back. This is not a likely scenario. I see them getting a AAA affirmation from Fitch with stable outlook in January.

I think in the end, Buffett brings new confidence to Muni insurance and after January this won't be talked about again after ABK and MBI get AAA's from all the agencies.

ABK i have more confidence in as MBI seems too fishy. The stock shouldn't have broken $24 with Warburg Pincus putting in money at $31. Maybe its the buy of century, but something seems wierd there.

ABK seems best of breed and didn't need to raise any money to keep AAA with S&P and Moody's. Fitch played hard ball and asked for $1 billion more, but this just rating agency politics. Fitch trying to gain points with this high profile rating call. I personally like PMI and RDN better than these 2. Mortgage insurance fundamentals going forward will be very strong. All these co's tricky though. Takes a dozen Actuaries and hours of number crunching to figure this stuff out. The shorts have no clue either. My guess is huge buying opportunity in all these.
 
Todays news of Warren Buffett getting into the business is simply news of a incoming newcomer to a competitive marketplace.....nothing more nothing less.

Of course his name recognition is enormous and that coupled with the recent string of negative headlines for the insurance sector produce an out of context 12-15% drop in market value.

I would venture to say that if this announcement were to occur in a more normal less panic stricken environment we would be surprised to see a 2% reaction in market price.

Bottom line ...the reaction was overblown and the stocks will rebound...end of story.

Now..taking a closer look at todays news. Buffetts stratedgy is to go after insuring the high end super safe G.O muni deals and by charging a higher fee to do so...as a trade between his presumably highest AAA rating. This is a bit of an experiment for Buffett to see if the market will come to him for a higher fee. Who was it that said this industry reminds one of a person picking up pennies in front of a steamroller. Buffet has no desire to go after anything but the smallest upper end of the market...hardly a major threat. If his self described experiment doesn't work...well then what has he lost? In doing so there is a silver lining for MBIA and Ambac. First of all it adds credence to the very business model some are calling unworkable. Secondly it widens the spreads (profit margins) within the industry...having a positve rather than negative impact on the industry. Thirdly MBIA and Ambac can also elect to play in this arena on equal footing simply by deciding to raise sufficient capital to make the ratings agencies happy...which they are committed to doing anyway.

I for one am happier to see this type of an announcement than one that drains their capital base through the default or downgrade of new subprime mortgages...and their will certainly be more of these. Todays reaction is overblown and the Davis Advisors and other well healed financiers that have already announced major stakes in these companies will certainly be in there snapping up more shares on days like today.

Today was a sucker punch day for newbie short sellers. The smart ones were covering. The rating agency risk is now quatifiable and actionable. The shorts won't have many days like today left to fully realize their massive gains. Those remaining are like those that stick around parties too long...they don't get invited again.

Why Buffett didn't buy a chunk of equity in MBIA or Ambac with a preferred income stream...add more conservative underwriting limitations and then announce to the world his actions and see the stock price double in 6 months to one year...well he only knows that answer. However there are plenty of other deep pocketed white knight investors to take that role instead of Warren...so stay awake... it is likely to occur.
 
Quote from silk:

the drop was rather ridiculous. It is already a very competitive market with many players. One more not going to make a diference. More importantly, Buffett operatin is very small with only $160 million investment and ony liscensed in one state. ABK and MBIA are already cutting back to preserve capital and reinsuring past business. Not having enough business is not the issue with these companies. I don't know if ABK or MBI are good buys, but they should not have dropped more than 10 cents on the Buffett news. If anything it was positive as it stabilizes the perception of AAA bond insurance for Muni's.
More...

Anyone who says Berkshire Hathaway is a small operation has no idea of what he is up against.

http://www.bloomberg.com/apps/news?pid=20601087&sid=abvy_cUjUwmI&refer=home

``I don't think anybody's ever made much money betting against Warren Buffett and Berkshire Hathaway,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``His investment in China was the big brass ring that he grabbed in this period.''
 
wasn't ACA AAA rated until all of a sudden they went to CCC....

did somebody at Moody's spill their coffee on the pinks sheets and see ACA there and say... "hey, look at this...?"
 
the issue with MBI and ABK is not the compeitive landscape of the Muni insurance market. If PE's and profit margins on future business were the dominant issue, the stocks would be in the 50's and 60's.

Its about capital raising and short raids and potential liability on CDO insurance. Buffett has nothing to do with his or the pricing of the stocks.

If ABK/MBI were trading at 12 PE and at former highs, then maybe compeitive landscape would be sometihng investors should be considering.

But these stocks are trading at 4 PE's and 50% of book values. Investors aren't going to sell their stock because Warren buffett's new company might drive the PE from 4 to 4.5 on competition. Getting AAA affirmation, capital raising is what matters. The core business is already discounted 50% because of these issues. Whether or not Buffett eventually takes 15% market share in years to come not to pressing a concern
 
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