MBIA, Ambac May Each Lose $11.6 Billion, Ackman Says

MBIA, Ambac May Each Lose $11.6 Billion, Ackman Says

Jan. 30 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, may each lose $11.6 billion on guarantees of mortgage-linked debt and other securities, according to hedge fund manager William Ackman.

The losses were calculated using a model supplied by an unnamed investment bank, and the findings were sent in a letter to the Securities and Exchange Commission and New York Insurance Superintendent Eric Dinallo. Ackman is a managing partner of Pershing Square Capital Management LP, which is trying to profit from declines in the stocks and bonds of MBIA and Ambac.

Ackman, 41, stepped up his attack by posting on the Internet a list of asset-backed collateralized debt obligations and other securities guaranteed by MBIA and Ambac that allows others to craft their own loss predictions. Ackman didn't say how he got details on the securities, many of which haven't been disclosed by the companies.

``Up until this point in time, the market and the regulators have had to rely on the bond insurers and the rating agencies to calculate their own losses in what we deem a self-graded exam,'' Ackman said in a statement preceding release of the letter. ``Now the market will have the opportunity to do its own analysis.''

MBIA closed down $2.02, or 13 percent, at $13.96 in New York Stock Exchange trading. Ambac dropped $2.08, or 16 percent, to $10.85. Both companies have lost more than 80 percent of their market value in the past year.

Peter Poillon, a spokesman for New York-based Ambac, and Michael Sitrick, a spokesman for Armonk, New York-based MBIA, didn't immediately return telephone messages seeking comment.

Other Estimates

Bond insurer credit ratings are being reassessed on concern by Fitch Ratings, Moody's Investors Service and Standard & Poor's that the companies don't have enough capital to cover losses stemming from downgrades on securities they guarantee. The extent of those losses hasn't been determined partly because of the difficulty in valuing the complex debt instruments involved.

To determine whether the companies will retain their top AAA rankings, stamped on $2.4 trillion of securities they guarantee, analysts have tried to estimate likely losses on bonds and on collateralized debt obligations.

In a report last week, New York-based JPMorgan Chase & Co. analysts forecast pretax losses related to residential mortgage securities of $11.4 billion for Ambac and $8 billion for MBIA. S&P said earlier this month that Ambac could lose $1.9 billion after taxes, and MBIA $3.2 billion.

Downgrades and Bailout

Ambac said Jan. 22 it expects to pay claims on CDOs of $1.1 billion. MBIA said Jan. 9 it will likely report a $737 million expense for the fourth quarter to cover losses related to deteriorating subprime-mortgage securities it guarantees. MBIA is scheduled today to report its fourth-quarter results after the close of regular U.S. equity trading.

Fitch today downgraded Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, two levels to AA from AAA, after the company failed to raise capital. Earlier this month, Fitch also cut Ambac Assurance Corp. to AA from AAA, and Hamilton, Bermuda-based Security Capital Assurance Ltd.'s XL Capital Assurance and XL Financial Assurance five steps to A.

Industrywide downgrades may force sales by investors who are required to hold only the highest-rated securities and cut profit for banks that have already posted $133 billion of writedowns and credit losses tied to the falling value of mortgage securities.

New York State insurance regulators met Jan. 23 with U.S. banks to discuss raising new capital for bond insurers. Talks in New York with the unnamed banks are part of Dinallo's effort to stabilize the bond guarantors and bolster the market's finances.

2002 Report

Bond insurers are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages as well as CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities.

Ackman, who co-founded Gotham Partners LP in 1993, has been critical of MBIA's AAA ratings since 2002, when he wrote a report ``Is MBIA Triple-A?'' New York-based Pershing Square stands to profit if MBIA's and Ambac's holding companies go bankrupt.

In a Jan. 18 letter addressed to the top executives of each ratings company, Ackman said they are underestimating potential losses at MBIA and Ambac by relying on after-tax results, failing to update ratings on reinsurers of bond insurance and ignoring the slide in the commercial mortgage-backed securities market.

In addition to MBIA, Ambac and Security Capital, the other AAA bond insurers are those owned or operated by Assured Guaranty Ltd., CIFG Assurance North America, FGIC Corp. and Financial Security Assurance Inc.

BLOOMBERG