Posts filed under “Valuation”

MBIA DESERVES to Go Belly Up

"DESERVES to go belly up" seems to be our latest new series, but its not. Instead, this is the 2nd — and hopefully last — example of a lousy company whose value has been greatly diminished by poor management threatening or actually suing an analyst/fund manger/critic. (Our 1st example being BankAtlantic).

The latest act of wanton idiocy from corporate assclowns: Suing critical analysts and fund managers who have brought to light the malfeasance of management in running the firm into the ground.

The beleaguered management of the moment is the team at MBIA (MBI); they are "considering" suing Bill Ackman of Pershing Square. The basis of the suit, as reported by Bloomberg, is a somewhat obscure
NYS law against spreading false rumors or making statements "untrue in
fact” about an insurance company’s insolvency (I do not know if this
law was constitutionally tested for passing 1st Amendment limitations, but that sure is an interesting question).

There are few absolutes in investing, but this may be one of them — I always run-not-walk-away from any firm that engages in this sort of corporate silliness. Rarely will you stumble across a less productive, more foolish
admission of unsuitability to be running a public firm
than suing your critics. All it does is draw more attention to your
past foibles, incompetencies, and random errors.

Since that seems to be what management wants, than we shall happily accommodate them with a brief history of their unconscionably gross mismanagement.

Like Ambak (ABK), MBIA ran what was an enviably low risk, high return business. They sold a product that was more or less unnecessary — Muni Bond insurance — to willing buyers that saw a decrease in borrowing costs once they bought into the game. I don’t buy into the notion that muni bond insurance is a scam, but it comes close: Fund buyers got insured paper, Muni borrowers got lower rates (therefore saving on borrowing costs), and ABK/MBIA got well paid for insuring bonds that went bust at one of the lowest rates of all classes of fixed income paper.

As we noted back in January, that high profit, low risk situation — despite its enormous profitability — was obviously intolerable. In came the
financial engineers, as the thought process seemed to be "Hey, we should be issuing insurance on riskier paper — think about how much much bigger the premiums are than boring
old munis!"

Was it Ackman, or management that brought down the stock? Let’s take a quick look at some charts to see where the market first started to recognize the fundamental problems at MBIA:

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Volume Begins to Pick Up Amongst Bad Earnings and News
Mbia_2007_churn

Chart via Bloomberg, FusionIQ

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Note the chart above; from May to July/August 2007, the average daily volume moved from 2 million shares a day, to nearly 5X that amount. Several days saw 10-12 million shares. That strongly suggests the marketplace was not liking what it was learning about MBIA, or their exposure to riskier segments of the credit markets.

The actual news that Summer was increasingly discouraging for the monoline insurers: Two of Bear Stearn’s hedge funds began blowing up due to sub-prime issues. In July, MBIA had a disappointing earnings report; Part of the reason were losses of 9.6 million from investments in these failed hedge funds run by Bear Stearns. I cannot imagine why an Insurer would be an investor in hedge funds, but to me that suggests very irresponsible decision making from the management of MBIA.

Previously, the CEO had been fired ("resigned" was the official explanation), and CNN reported "amid industry-wide crisis, former CEO
Joseph Brown assumes control." This is rarely a good sign.

There was even more evidence of trouble back in 2007: MBIA Credit Default Swaps were trading at Junk levels — despite being rated triple AAA.

"If you expect more headline risk, they’re a logical choice to short,” said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut, said of MBIA (Bloomberg). As credit quality weakened, those bets paid off handsomely. 

The next few major volume days were nearly 18 million shares and almost 30 million shares on several big downside moves. Then on December 20th, the stock gapped down from $27 dollars, and traded to $19 — on 52 million shares.

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Huge Down Volume on May Breakdowns
Mbia_big_down_vol

Chart via Bloomberg, FusionIQ

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Note that the news seemed to have been acted upon more urgently in November and December, as the mortgage crisis and subprime problems spread rapidly. The huge volume suggests that the news was widely acted upon by many market players.

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My biggest issue with both of these suits is the chilling effect. Markets operate on the principle of freely exchanged information leading to the Truth. Nothing should prevent good faith analyses from being produced and disseminated.

Thomas Jefferson believed that truth would triumph in the free marketplace of ideas.  Anything that gets in the way of that process should be abhorent.  "I am for freedom of the press, and against all violations of the
Constitution to silence by force and not by reason the complaints or criticisms,
just or unjust, of our citizens against the conduct of their agents"
Thomas Jefferson 1799. ME 10:78 

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This was not supposed to be a continuing series — but unfortunately, seems to have become one. Last month, we noted that BankAtlantic DESERVED to Go Belly Up
for their suing Dick X. Bove. 

As noted, suing an analyst over a report is akin to blaming the shorts for
your stock price: It is a waste of time and corporate resources, a huge
distraction to management. As wee noted last time, investors can deduce a valuable piece of
information from the issue: They don’t want to own
BankAtlantic Bancorp (BBX), as it is apparent to this observer that management’s priorities are misplaced, and with
the stock at $2, they are spending precious capital and wasting time on nonsense.

Here we are again, only this stupidity is via the extremely dumb management team at MBIA.

I haven’t met either management team, but I can only assume that they are as dumb as the Alaskan night
is long in the dead of Winter. Even better, I assume their attorneys are bunch of asshats also.

The silver lining to litigation is that the defendant gets a tremendous amount of discovery. That includes access to corporate files, personnel reviews, internal memos, anything "reasonably relevant to the issue in controversy. Since MBIA will have made the gravaman of Ackman’s claims at issue by litigating, he gets access to ANYTHING that could help prove his claim.

Let me enter lawyer mode for a moment, with the caveat that I haven’t practiced in decades: Ackman
should immediately countersue
(Bove’s firm probably doesn’t want to, but
they should). 

Why? In the event that plaintiff eventually drops the litigation — which I bet they will do before it progresses too far — they no longer will have to respond to discovery requests. The countersuit prevents that escape, as Ackman now gets to defend his reputation, put into issue by MBIA.

Quite bluntly, I doubt either management team has the stones to pursue litigation to its logical conclusion. But a countersuit keeps the discovery process in the hands of the defendant — not the plaintiff. If that defendant is Ackman, I sincerely doubt that management wants him to see what they knew, and when they knew it.

Ackman should welcome the suit — and the opportunity to discover what management has not been forthcoming about.

Previously:
BankAtlantic DESERVES to Go Belly Up (July 2008)
http://bigpicture.typepad.com/comments/2008/07/bankatlantic-de.html

Counter-Party Risk  (January 18, 2008)
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

Source:
MBIA May Sue Short-Seller Ackman’s Pershing Square
Christine Richard
Bloomberg, Aug. 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYYyVJGvOm98&

MBIA, Ambac Risk Trades at Junk Levels on Subprime Defaults
Christine Richard and Shannon D. Harrington
Bloomberg Data Service, July 18 2007
2007-07-18 16:37:42.810 (New York)

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