Recent events may say that Ambac (ABK) has bottomed..
1- Ackman:
According to his SEC filing today, Pershing’s Bill Ackman no longer hold a short position in the company. The most vocal critic of the bond insurers, Ackman’s actions show he feels the downside from here is limited. It is also of note that he dramatically also scaled back his short exposure to MBIA (MBI) since December.
2- Whitman:
Value investor Martin Whitman has picked up over 10 million shares of the bond insurer. Whitman, whose Third Avenue Value has trounced the markets since its inception, is famous for his bets in troubled companies.
3- Exposure:
Ambac recently responded to a Moody’s rating inquiry “we have already taken substantial reserves against our CES and HELOC portfolios (48% and 33%, respectively, against below investment grade exposure). Moreover, we have not assumed any recoveries related to our active remediation efforts. Despite very stressful loss estimates of our portfolio, we believe we have already exceeded Moody’s stressed Aaa target as of April 30th, 2008 and we continue to build excess capital.”
It also said “Ambac has no material exposure to subprime borrowers in either asset class. The estimated range of average FICO scores for borrowers within pools we’ve insured in these asset classes is 695 – 745.”
The big news is the Ackman exit. Without his negative commentary (and the specter of his presence) on the insurers, sentiment will begin to turn and the value investors that have bought shares and their outlook will begin to take a dominant role.
It has become clear that the NY Insurance Commissioners Office has decided that these two, MBIA and Ambac will not fail. They have held off ratings downgrades and the public statements from the office are always an attempt to reassure investors. Let’s also not forget that a failure of either of these will not exactly put the Office in the best of light. Without pal Eliot Spitzer to look out for him, Commissioner Dinallo may be in danger of being able to “pursue other opportunities”.
That being said, the downward heat on both companies just subsided big time. With smart money pouring into Ambac, I think it may be time to take a small stake..
Disclosure (“none” means no position):None
12 replies on “Time to Buy Ambac?”
Nice arguement Todd. The only challenge is in how to value Ambac and whether the risk of further housing declines could impare their business.
From Barron’s – Credit-Default Swaps: Weapons of Mass Speculation, by Jonathan R. Laing (5/12/08): “…New York Insurance Superintendent Eric Dinallo saw fit during a mid-February CNBC interview to tell William Ackman, head of New York hedge fund Pershing Square Capital Management, to be careful with some of his criticisms of monoline bond insurers Ambac (ABK) and MBIA (MBI). Dinallo cited, among other things, a New York State law that prohibits false statements about the financial condition of state-regulated insurance companies. Ackman has since become less vociferous in attacking the two companies. He declined to discuss his current positions in Ambac and MBIA, though sources say that in the past he has bet the ranch on the demise of both holding companies, with long positions in the one-, five- and 10-year credit-default swaps, and short positions in the companies’ stocks… [Ackman] also charged the New York Insurance Department was remiss in allowing bond insurers to guarantee structured products like mortgage-backed paper. It was after this epistolary ‘outburst’ that Dinallo delivered his implied warning. Ackman since has acted mainly through surrogates in the media and elsewhere to paint a bleak picture of Ambac’s and MBIA’s future… Ackman won’t discuss Pershing Square’s trading in Ambac or MBIA except to say his fund has made some substantial profits in both. He still insists both holding companies eventually will be ‘toast’ as a result of capital starvation.”
So perhaps Ackman is simply keeping his mouth shut so as not to piss off the regulators. And, as mentioned in a comment to another post, short sales of stock simply do not show up in 13Fs. So I don’t know if you can conclude that he has taken off his bearish bets.
I am neither short nor long any of the bond insurers.
anon,
we can conclude his “bearish bet” is a fraction of what is was, no?
for an investor like ackman, that means he sees much less downside..
maybe, maybe not.
If the stock goes to zero, you get a 100% return (on a short sale), whether the starting price is $100 or $4.
The return on the puts is unclear, depending on their strikes and maturities (not in the 13F).
It may simply be that his strikes expired but he stayed short the equity (or shorted even more, for all we know). All we really know is that he has no more ambac puts and he has fewer mbia puts – but we don’t even know if the puts were a big part of how he traded this idea.
meant to say PUTS expired, not STRIKES expired.
anon,
we do not know they expired, he may have covered them
has was short 1 million shares (as of 12/31) through the puts, which at the time was about 1% of the outstanding common (102 million oustanding)
the mbia short was about 700,000 shares, now 75,000
neither position existed on 9/30
he has said in the past he shorted it through the CDS, i do not recall him ever saying he actually shorted the stock. with such a small float, it may not have been possible to any significance at the time
also, he may have closed out the short sale already, if there was one and we will never know
the bottom line is he has almost no reportable short position in either anymore
From his May 2007 presentation entitled “Who’s Holding the Bag?”: “Funds managed by Pershing and its affiliates own investments that are bearish on MBIA and Ambac. These investments include credit-default swaps, equity put options and SHORT SALES OF COMMON STOCK.” (my caps)
Another point – he has certainly been bearish on these guys for ~5 years, yet you point out that he had no puts at 9/30. That did not mean he was not bearish at that time, only that he was not long puts.
My point all along has been that we do not know the full magnitude/nature of his bets, and that the 13F offers inadequate information to change the default assumption (i.e., Ackman is bearish on bond insurers). This, in conjunction with additional information not in the 13F (Barron’s article; Ackman’s recent appearance on CNBC in which I BELIEVE – need to confirm – he made remarks bearish towards the bond insurers) gives me additional confidence that the default position has not changed.
In each of my hands I hold a number of marbles. My right hand is closed and my left hand is open. I put my hands behind my back, you hear marbles hit the ground, and then I put my hands in front of me so you can see them again. Now my left (open) hand is empty and my right hand is closed. It is illogical to conclude from this that I have therefore lost all my marbles, yet that is precisely the situation here. The only thing one can rationally conclude is the simple reality that I no longer have marbles in my left hand. Anything else is pure speculation.
anon,
here is the thing
if you look at the 13-f for 6/30 and 3/31/2007 for pershing, there were no put options in either ambac or mbi…the “other affilates” may have had the sales…
maybe he was saying those are the options he or they would use…
because he clearly did not own any puts…
as a matter of fact, there are no put position at all before 9/30/2007
any statement to the contrary
the ONLY thing that i can verify is that he has closed a substantial put position in abk and almost closed one in mbi. for the most vocal bear, that is substantial.
in the recent cnbc interview (on my blog), he did mention being short through the CDS for a long time. he said the positions were underwater until last year during the almost 20 min interview he made no mention of short sales
that being said, he may still be short shares, although even if it goes to zero, he only nets $3 more on the position. My guess he thinks there is better appreciation in other stocks hence the increase in SHLD and target stake….
thus the reduction…..
as for the marble analogy. you forgot the value of the marbles. I can surmise if your left hand has no more marbles that you think the value of having them has diminished to the point you would rather not hold marbles anymore….
just like ackman and abk.
ok – this is my last one and I am done with this and you can have your final say – I can see you are wedded to your conclusion.
it’s your blog – I’m just trying to give your readers the counterargument to your assertion that he is no longer short, an assertion you use to support a long position in ABK.
I agree that Ackman thinks the bearish bets on bond insurers are less attractive than they were a year ago (although they still may be good bets), since the bearish story is now out there and much more priced in. that is not my point – you said he’s no longer short, but you are drawing too broad a conclusion – it is simply not borne out by the evidence.
The fact that he has had bearish positions for many years, and that the puts didn’t show up until late 2007 SUPPORTS my argument that the 13F is a woefully incomplete picture of how he is positioned. He had big bearish bets on, but the 13F didn’t show it. In the summer of 2007, you would have been incorrect to say “Ackman is not bearish on ABK because he doesn’t own puts on ABK”, but you are making exactly that statement right now.
Back to the marbles – it is not a completely unreasonable speculation that there are no marbles in my right hand based on relative values, but it is still speculation without evidence. It is foolish to then state conclusively that I am holding nothing at all – you simply don’t know.
i agree… time to end this..
i think you make the exact opposite assumption i do…that just because you cannot see it, it is still there (if it ever was)
that being said, i am basing my assumption on the evidence we can see
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