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December 15, 2007




thanks again for the great work. your blog continues to stand out as superior to the many many high quality blogs I follow.

question for you....

your in depth analysis of MBI and ABK make it clear they are heading for deep trouble. what about companies like MTG and PMI? i know they have been hit hard already but aren't those companies more likely to end up completely destroyed as they insured all of these insane home loans?

and while we're at it what about Moody's. do you think there is any reason for that company to exist after all of the worthless ratings they have offered and won't they likely face multiple lawsuits that should be the final nail in their coffin?

just wondered if you had any comments on these 3 MTG PMI and Moody's

thanks again

Captial Gain

You state:

"If I was a foreign investor or an investor that did not have the wherewithal to perform my own credit analysis, I would absolutely ignore the credit ratings agencies."

And then:

"PS, the CDS market considers Ambac debt near junk to junk, but what the hell would the collective knowledge of the market know."

So, obviously the market has discarded the flawed alchemy of the ratings agencies business model like common medical waste.

So far.

It will be interesting to see how the market reacts to this news. And at some point all will be forgiven and forgotten and business as usual will resume.

Yet another lesson in how difficult it is to make money shorting over the long term.


I don't follow PMI and MTG closely, so I cannot accurately comment. From a common sense perspective, I wouldn't buy the stock, even with your money:-) Keep in mind that the most dangerous loans were made to avoid having to pay PMI, the second lien loan. So they are off the hook there, but primary lien performance is enough to quake a balance sheet.

As for Moody's, I was talking to an ex-employee who made clear that Moody's offers opinion, not advice, thus cannot be held as a fiduciary. This has been there line from the beginning. I think it will be put to the test from a litigation perspective rather soon. I am not a lawyer, but a lack of full disclosure of the conflicted interests between moody's and their non-paying clients (us, vs. the guys that pay them to make an opinion, ex. the monolines) may open the door to some liability.


@ capital
Shorting over the long term is really the only way to go, for you have to ride over the market blips that are caused by things other than fundamentals. The guy that I got the monoline short idea from, Ackman, was short over 5 years. He rode it up and down, and even went to Congress, the ins. dept. etc. to manage his short position (and possibly to do some good, you never know:-)

If you can't hold on to your position for 6 months, you should not be in it. That is my opinion. That is why competent research is valuable, it gives you confidence and stamina in your position, as well as emotional and mental staying power. As for financial wherewithal, that's what hedges are for.

My position on ABK and MBIA is that unless the rating agencies are going to swallow those structured product losses, their opinions are close to meaningless. I will post a quick blog on the admitted flawed methodology of one of them, eventhought it is obvious by now.

Captial Gain

While I agree that one of the biggest mistakes you can make shorting is not going out long eneough (as you say at least 6 months), I also know that it's the very, very few like Ackman who can afford such bad timing!

Seriously though, the point I tried but failed to make is that the poltical, financial and market forces which work to serve the long side far outnumber their short side counterparts.

Generally speaking, the longs get the benefit of the doubt while the shorts must prove their case beyond any reasonable doubt.

Specifically speaking, though you and I both know this latest move is just smoke and mirrors, tomorrow I will be covering some or all of my ABK and MBI puts to protect profits.

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Both MBIA and Ambac are top-rated insurers, and both have announced moves this month to boost their capital, which could help protect those ratings.

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Could it be that management did not have the foresight to see this opportunity coming just last month.

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