The Wall Street Journal-20080202-Credit Crunch- Bond-Insurer Foe Soldiers On- Pershing-s Ackman Shorts Big Players- Opposes a Bailout

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Credit Crunch: Bond-Insurer Foe Soldiers On; Pershing's Ackman Shorts Big Players, Opposes a Bailout

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At a time when most investors would be counting their winnings, William Ackman, head of hedge fund Pershing Square Capital Management LP, is ramping up his high-profile campaign against bond insurers, even as news swirls that a possible bailout is in the works for the insurers.

Mr. Ackman, who has been criticizing the bond insurers for five years, says he still has a multibillion-dollar wager against them, including credit-default swaps he used to bet specifically against MBIA Inc. shares in 2002.

Mr. Ackman's bet against bond insurers Ambac Financial Group Inc. and MBIA is based on the assumption that any rescue plan by big banks will be designed to allow the insurers to make good on their policies. Those policies were issued by subsidiaries of the publicly listed parent companies.

He believes that any bailout will only save the subsidiaries, leaving shareholders in the listed entities with nothing. "The reason why we're still short the holding companies of MBIA and Ambac is because we believe the regulators and the banks are working to help policyholders, and not holding-company shareholders," he says.

In recent weeks, ratings agencies have started to come around to his argument that the bond insurers have flawed risk-management practices that have left them with significant shortfalls in capital. As the mortgage crisis increases the potential for more losses in securities they guarantee, bond insurers are under pressure to raise more capital to preserve their triple-A ratings, which are critical for doing business.

Moody's Investors Service Inc. and Standard & Poor's have placed both Ambac and MBIA on watch for downgrade, while Fitch Ratings has already downgraded Ambac to double-A.

On Friday, news that a consortium of eight U.S. and European banks were working together with regulators to save Ambac from further downgrade lifted its shares 13% to $13.20 in 4 p.m. New York Stock Exchange composite trading. MBIA shares rose 5.6% to $16.36. They are still down more than 75% from their highs of last year, but have more than doubled off their lows of January.

While Mr. Ackman says he supports efforts to protect bond insurers' policyholders, he says he is against a bailout on grounds that it would set back efforts to increase transparency in the financial markets.

He characterizes the bailout as an attempt by banks to "arbitrage" the stringent capital requirements of federal bank regulators with what he says are less-stringent requirements of the ratings agencies, which oversee the bond insurers. That is, a bailout to prevent the bond insurers from downgrade would cost the banks much less than taking the losses that would occur if the insurers went out of business.

By some estimates, a failure of the bond insurers could cost banks as much as $70 billion in losses, while ratings agencies have said that Ambac and MBIA may need several billion dollars more each to retain their triple-A ratings.

"If the bailout is to protect muni-bond holders, we are strongly supportive," says Mr. Ackman, 41 years old. "But if the bailout is a mechanism for banks to continue to hide losses off balance sheet, then we think it's very bad for the capital markets."