Fund Manager Ackman Shorting Financial Security Assurance

Though Financial Security Assurance (FSF)  is currently rated AAA, Hedge fund manager Bill Ackman thinks the company may be headed for trouble.  Bloomberg's Christine Richard points out in an article on Bloomberg.com that Ackman, who made similar (and, it turned out, largely accurate) predictions regarding monoline insurers MBIA (MBI) and Ambac (ABK), believes that all is not rosy under the hood:

Financial Security may be insolvent because it sold investment contracts backed by mortgage securities that have tumbled in value, Ackman, 42, told a conference hosted by law firm Jones Day yesterday in New York. Financial Security, a New York unit of Brussels and Paris-based Dexia SA is one of two bond insurers to retain their AAA credit ratings after rivals were roiled by losses from collateralized debt obligations.

``The market has not woken up to FSA,'' said Ackman, who runs the $6 billion Pershing Square Capital Management hedge fund. Ackman says he will make hundreds of millions of dollars if MBIA and Ambac go bankrupt. ``FSA is AAA stable, just don't look too close.''

Ackman is effectively shorting the company by using credit-default swaps on the company's debt: 

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Financial Security offers investment contracts with a return guaranteed by its insurance unit to municipalities and other investors looking to park the proceeds of bond issues. The value of some of the securities backing those contracts has tumbled so much that the company's liabilities of $20.4 billion exceed its assets of $16.2 billion, Ackman said.

According to Richard, Ackman has a solid track record at predicting these issues and generating profits for his fund as a result:

In January, Ackman estimated MBIA and New York-based Ambac faced losses on home-loan securities of almost $12 billion each, a claim the companies disputed as recently as February.

...

Pershing Square profited as MBIA tumbled 91 percent in the past 12 months and Ambac plunged 98 percent in New York Stock Exchange composite trading. Security Capital is down 98 percent.

Ackman believes that the entire industry is in big trouble:

``There's not likely to be a man left standing'' in the bond insurance industry, Ackman said. ``This thing is over already, the market just doesn't know it yet.''

 

Comments

[Ishortyou]

In respect to Ambac and MBIA, they need to keep and save their cash they already have and any cash coming into their coffers, deleverage from annoying debts, obligations and risks, stop paying dividends to increase their book value and once their book value is adequate and sound reinstate their triple A ratings again to start writing down new public bonds insurance only in low risk areas of the market. This strategy in itself is the best advertisement to recruit new business because the new clients will precieve that " if these folks were able to survive the credit crisis then they can survive anything".

AMBAC and MBIA are already doing this strategy, so now its a matter of time for their book value to appreciate quarter by quarter to reinstate their triple A again, you dont have to be a rocket science to figure this out.

[vittello]

Please don't glorify this ...... What he's doing is making predictions that require very little capital to fulfill. no brilliance here, just a guy with a loud mouth that deserves to be investigated by the sec. OK, you made your money, now please push on somewhere else and allow these stocks to be re-connected with their legitimate values.

[Anauso]

Ackman the time is running jajajaja

[oldlures1]

vittell's right - Ackman is an activist hedge fund manager with a "loud mouth" and an agenda. To his credit, he's an extremely effective propogandist, and will use that tool to his financial benefit...and no one elses, I asure you.

But this time, I think he's bitten off more than he can chew, and is showing his true colors.

[gaucho]

we will see, I happen to think that the man is smarter than 99% of the Wallstreet Clowns. Just because he gored your ox don't go away md, just go away and stop Bitc-ing

[User 213839]

Can anyone provide a link to the presentation? It's impossible to get a feel for whether Ackman makes a strong case without seeing details.