Memo to MBIA: Don’t Get Carried Away

MBIA (MBI) is considering suing Pershing Square and Bill Ackman. I think the last thing MBIA want to so is get into a “whose statements were more truthful” pissing contest with Ackman.

Bloomberg Reports
“MBIA Inc. said it may sue Bill Ackman, striking back against the hedge fund manager who waged a six-year campaign against the bond insurer and said this year that the company may be insolvent.

MBIA is “assessing all our options, including litigation” against Ackman’s Pershing Square Capital Management LP, Chief Executive Officer Jay Brown said on a conference call today after the Armonk, New York-based company reported a $1.7 billion profit. Ackman, in an e-mail, said he stands by his comments.

Brown’s decision to consider legal action escalates a feud that began when Ackman wrote a 2002 report criticizing MBIA’s use of credit-default swaps to guarantee debt. Ackman has appeared before Congress and written letters to the U.S. Securities and Exchange Commission, at the same time betting against the stock.”

Ackman in the article said “Ackman, 42, said in his e-mail that “we continue to believe that MBIA is insolvent” under one of two tests in state insurance law. The test relies on whether an insurer can afford to reinsure its liabilities in the current market. MBIA appears solvent under the other test, Ackman wrote, based on statutory filings which rely on management predictions of future losses, though he called those estimates “understated.”

Here is the thing. It looks as though MBIA and Ambac (ABK) have avoided BK for the near future. It was done in no small part from help from NY Insurance Commissioner Eric Dinallo’s constant assurances on TV the insurers were in fact solvent and his work behind the scenes. Does anyone really think that if Ackman is sued he will not call for all conversations and emails between the bond insurers and the Commissioners office to be made public?

Do we really think Dinallo wants that to happen?

Ackman has been right on MBIA up until this point. It appears MBIA may have escaped the worse, perhaps because folks grew tired of the story and moved on the bigger fish (Fannie (FNM) and Freddie(FRE)).

One would think that the last things either insurer want is a court of law going over their books line by line and forcing them to disclose everything to the world. They can’t want that and I get the feeling Ackman would welcome the chance.

Sun Tzu in the “Art of War” said that many times it is better to “retreat in order to survive to do battle another day” (paraphrase).

This is one of those times….

Disclosure (“none” means no position):None