Real Estate Lender Implosion

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US bond insurers expected to fall further

By Aline van Duyn and Saskia Scholtes in New York

January 29 2008 21:13

Large numbers of investors are continuing to ‘short’ shares in Ambac and MBIA, the two biggest US bond insurers, suggesting expectations of further share price falls despite growing efforts by regulators to push through a rescue plan for the sector.

According to Data Explorers, which tracks short selling, the percentage of shares on loan relative to the market capitalisation of Ambac stood at 40 per cent last Thursday. For MBIA, the proportion was 39 per cent.

Efforts to shore up US bond insurers gathered pace this week as New York state regulators appointed investment bankers to advise on a rescue plan that could include back-up credit lines.

Perella Weinberg, an advisory firm based in New York, has been hired as a financial adviser by the New York state insurance superintendent department. Regulators are talking to banks about providing back-up credit lines for the bond insurers. In addition, they are talking to other parties, including private equity firms and billionaire investors such as Wilbur Ross and Warren Buffett, about providing fresh equity capital for insurers such as Ambac and MBIA.

The rescue efforts come amid concerns that bond insurers are running out of time to reassure rating agencies that they have enough capital to deal with losses related to guarantees of bonds exposed to subprime mortgages.

Debt markets are pricing in the likelihood that bond insurers will lose their triple-A status.

Those going short include Bill Ackman, head of Pershing Square Capital Management LP, a New York hedge fund that has been betting heavily for years against bond insurers.

Current short levels are below the highest proportion of borrowed shares reached at the beginning of January for the bond insurers. However, they still represent a very high level of borrowing.

Even in other cases where shares have been shorted, such as those of UK bank Northern Rock last year, the proportion of shares on loan to market capitalisation rarely reaches the levels on Ambac and MBIA. Data Explorers said that Northern Rock’s borrowed shares peaked at about 22 per cent of market capitalisation in September of last year.

The threat of further downgrades for the bond insurers has sparked concerns about the broader fallout for holders of insured bonds, particularly municipal money market funds.

”Over the last eight weeks, money market fund managers have been looking to reduce risk and their exposure to insured bond programs, and they have been exercising their right to put these back to the brokers,” said Said Rafat, managing director at Fitch Ratings.

http://www.ft.com/cms/s/0/84a403ec-cead-11dc-877a-000077b07658.html


See the bottom of the following post for charts of the bond insurers (ACAH ABK MBI SCA) ... #msg-26226667