This is becoming the investing world’s Ali vs. Frazier. Legend Martin Whitman takes on Bill Ackman for another round in his latest letter:
I am torn on this one. The only mutual fund I own is Whitman’s Third Avenue Value (actually my son has it in his Coverdale) and I am a huge fan of Ackman and do watch his action closely. So who is right? I have documented Ackman’s stance on both MBIA (MBI) and Ambac (ABK) here in the past in detail so let’s go to Whitman’s retort.
Whitman states “MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business.”
He then says there are 3 main reasons this may not happen:
1- Capricious regulators (they actually seem to get as much of his wrath as Ackman does)
2- NY State insurance Regulators and Elliot Spitzer
3- Ackman and his “bear raiders”
He then says that while Ackman is an “articulate advocate” (this contrasts to the “slick salesmen” comment he made late last year) who is wrong for three reasons.
1- The “cheapness” of AAA insurance is not a broken model
2- GAAP analysis of the insurers portfolio by a “mark to market approach”. Whitman claims this is “arrogant nonsense” and that they should be judged on “what percent of obligations default and how they work out”. He sarcastically points out the the market has “correctly predicted 9 out of the last 5 recessions.”
3- Debt senority: Whitman says that MBIA’s structured debt appears to be almost all “senior” or even “super senior” and the risk of default is minute despite what Ackman and others claim.
So, what do we think? They are both right. Ackman has been dead on to this point and Whitman will be right long term. Ackman correctly predicted the current situation the insurers find themselves in. He was the first to make the call in 2002 and has not wavered in his belief.
Whitman will be right long term because there are too many parties with too much at risk to let the insurers fail. Now, there will be a massive dilution of shareholder interest along the way, but they will not fail.
That being said it does not mean that shares may not see low single digits before then so if you are going to invest, do so with a very strong stomach.
With all the plans out there and all the big fish billionaire investors like Buffett, Whitman and Ross circling around, my guess is Ackman will take his winnings and leave the tale very soon, if he has not already. He will does so as a huge winner in this fight.
Please read the full letter here:
Disclosure (“none” means no position):Third Avenue Value Shareholder and now long MBIA through the fund, Ackman fan
