Battleground in the Bond Insurers

by StockJockey

Wednesday, December 19, 2007 - 3:55 pm

Trading volumes will continue to taper off as we head into the end of the year; Raj sent half of his team to the beach to celebrate another solid year, in general, for the Galleon strategies. For many people under the gun It is probably too late to make up ground this year, short of throwing a Hail Mary on a large position in the mortgage insurers.

Today the stocks are coming back from an early drubbing, which was supplied courtesy of Standard & Poors:

Standard & Poor's on Wednesday slashed its outlook for Ambac Financial Group and MBIA Insurance Corp, the world's biggest bond insurers that insure more than $1.2 trillion in debt. S&P now has a "negative" outlook for those bond insurers, and for XL Capital Assurance, a unit of Security Capital Assurance (NYSE:SCA - News), indicating their triple-A ratings have a greater chance of a rating cut in the next two years.

It also is reviewing Financial Guaranty Insurance Co, a unit of Blackstone Group LP for a downgrade, citing deteriorating performance of mortgage debt and collateralized debt obligations.

"The rating actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage-backed securities and CDOs of asset-backed securities," S&P said in a statement. S&P also cut its ratings on ACA Financial Guaranty Corp to junk status. ACA's rating was lowered to "CCC," or eight levels below investment grade, from "A," the sixth-highest investment-grade rating. Reuters

The price action has supplied plenty of trading opportunities; Ambac has been essentially a stalemate over the past month while MBIA has moved lower since Ackman took his bear thesis public at the Value Investing Congress at the end of November. No position for us, but you can see what he is thinking after the jump.

Indeed, the shares of MBIA (MBI-NYSE) and Ambac Financial (ABK-NYSE) have been gyrating wildly in the past few weeks as high profile shorts press their bets on what they believe to be the surest thing since Enron collapsed. Ambac’s bonds were downgraded last week, their exposure to $29 billion of CDO’s will prove mostly worthless if the bears are right is their assessment. MBIA was taken out and shot earlier last week.

Of course the management teams are fighting back; this is an old fashioned slugfest. As far as we know, Ackman’s stance has not changed since he went public with it three weeks ago.