Regulators should halt bond insurer dividends: Ackman

By Dan Wilchins

NEW YORK (Reuters) - Hedge fund manager Bill Ackman told regulators on Wednesday that the two biggest U.S. bond insurers face combined losses of over $23 billion and should be forced to stop paying dividends.

Ackman, whose Pershing Square Capital Management has been betting for years that shares of the bond insurers will weaken, said in a letter to regulators that Ambac Financial Group Inc (ABK.N) faces losses of $11.61 billion from asset-backed securities and collateralized debt obligations it insured.

Rival bond insurer MBIA Inc (MBI.N) faces at least $11.63 billion of losses from these obligations, plus additional losses from reinsurance that may no longer be valid, he said.

To preserve capital, Ackman said Ambac and MBIA should be forced to stop shifting money from their operating subsidiaries to their holding companies.

Money moved to the holding companies can be used to pay dividends, and pay holding company debts and expenses, but money kept at the operating subsidiaries can be used to pay claims. State insurance regulators typically look to make sure insurers can pay off their claims.

Pershing Square's short bet against the bond insurers has paid off handsomely in recent months.

Ambac's shares, which fell 17 percent to close at $10.73 on the New York Stock Exchange on Wednesday, have shed 88 percent of their value since the beginning of 2007. MBIA's shares, down 12.6 percent to $13.96, have fallen 80 percent over the same period.

The losses Ackman is projecting are significantly larger than what the bond insurers themselves have projected.

Losing over $23 billion combined would be a real blow to Ambac and MBIA, which insure a total of more than $1.2 trillion of debt.

Ambac last week recorded $5.2 billion of write-downs for credit derivative positions, pre-tax.

MBIA said in a supplement on January 9 that it expects some $4 billion of charges for 2007 linked to changes in the market value of some securities and boosting of reserves, but that its capital after a recent spate of fundraising was sufficient to maintain top ratings.

The main units of Ambac, MBIA and other bond insurers are struggling to keep their top-triple A credit ratings.

Fitch downgraded Ambac's top rating on January 18. The ratings agency also downgraded smaller bond insurer FGIC on Wednesday.

If Moody's Investors Service or Standard & Poor's cut the top ratings for Ambac and MBIA, investors that can only hold AAA-rated securities could be forced to sell billions of dollars of bonds, sending borrowing costs for city governments, consumers, and others soaring.

FEARS WEIGH