01.24.08
My advice to Bill Ackman and anyone else short the bond insurers
I have some advice to any of you who think that now is a good time to short the bond insurers: don’t do it. Don’t mess with the government. By all rights, the bond insurers are already insolvent, dead, and it is only a matter of time before they are gone. However, politicians do not like turmoil and they love bailouts. They also love cheap insurance for government bonds. Therefore, there will be a bailout in some way. It may not save current shareholders, but the bailout has the risk of killing the shorts. For that reason, now is a good time to stay away from MBIA (MBI: $10.38 -7.16%, market cap: $2.837B) and Ambac (ABK: $5.19 -7.65%, market cap: $1.489B).
A theoretical trader who shorted the infamous Semper Augustus tulip bulb at 5000 florins during the Dutch tulip mania would have had a great win snatched by the government’s cancellation of all tulip contracts. This is a similar case where it would be smart to stay out of the government’s way.
For why I think the bond insurers are dead, see Bill Ackman’s letter to the rating agencies about the bond insurers.
Disclosure: I grow no tulips and have no position in any stock mentioned. I have a disclosure policy.