Whitman holds firm on MBIA, Ambac bets

By Herbert Lash

NEW YORK (Reuters) - The credit crisis that has crushed the share price of bond insurers has not fazed Marty Whitman, regarded as one of Wall Street's savviest investors, who boosted his stakes in the sector through January.

Whitman also belittled New York efforts to bail out the battered bond insurers, saying they did not need such help. And in effect he put his reputation up against William Ackman, a hedge fund manager whose big bets on share price plunges in the industry have received wide media attention.

Whitman, founder and co-chief investment officer of Third Avenue Funds, increased his holdings in the two largest bond insurers -- MBIA Inc (MBI.N) and Ambac Financial Group Corp (ABK.N) -- during the fund's first quarter, which ended January 31. He also boosted stakes in mortgage insurers MGIC Investment Corp (MTG.N) and Radian Group (RDN.N).

There is "much profit to be made in" the bond insurers, whether the companies continue as going concerns or write no new policies and sell off their existing business, in part or in whole, Whitman said in a letter to fund shareholders.

The common stock of the four companies has been selling at discounts of about 70 percent from tangible book value, he said.

Whitman, who has made a name by buying assets most other investors shun, in January increased his stake in MBIA, the largest bond insurer, at $12.15 a share and now holds about 10 percent of its outstanding shares.

Third Avenue also has bought $326 million of the $2.6 billion MBIA has raised in new capital through note sales, which Whitman said made the company "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," Whitman said.

MBIA's rating from credit agencies is the highest possible at AAA but agencies' outlook for it is negative, indicating a change could be possible in the future.

Three impediments might prevent MBIA from winning a stable outlook, he said. The credit raters might take an arbitrary or capricious stance, MBIA is subject to New York state regulatory risk and Ackman might adversely affect the company, he said.

A "supposed severe decline" in the monoline's "franchise value" could deny it a AAA rating, while Gov. Eliot Spitzer and other state officials do not appear to fully appreciate the financial strength of MBIA and other unnamed companies, he said.

The need to bail out or rescue the bond insurance industry seems grossly misplaced, in particular MBIA, Whitman said. Neither MBIA or No. 2 bond insurer Ambac need to be rescued as the two companies seem to have more than ample resources to meet any contractual requirements to policy holders, he said.

Whitman said Ackman's bearish views had made it possible to buy MBIA at depressed prices. But the founder of hedge fund Pershing Square Capital Management does not seem to understand how property and casualty insurance is profitable, he said.

Ackman has been critical of bond insurance companies, saying they do not have enough capital to handle a surge in claims. He has held a large short position in the bond insurers, which means he profits if the stocks fall.

Ackman's widely publicized arguments, which have helped slam the share price of the bond insurers, are off base, Whitman said.