Pershing's Ackman Says MBIA Could Go Under in 2nd-Qtr

By Michael Flaherty and Megan Davies

NEW YORK (Reuters) - Bond insurer MBIA Inc (MBI.N) could be insolvent as soon as the second quarter of 2008 if it cannot raise additional capital, activist investor William Ackman said on Wednesday.

Ackman's Pershing Square Capital has shorted shares of Ambac and MBIA, meaning the fund profits if the bond insurers' shares drop.

Ackman estimates MBIA will incur $2.2 billion of losses in the fourth quarter, and rival bond insurer Ambac Financial Group Inc (ABK.N) will incur $4.2 billion of losses.

A spokesman for MBIA said, "The company strongly disagrees with Mr. Ackman's statement that the company will be insolvent in the second quarter of 2008. He made similar statements in 2002, none of which have come true."

Bond insurers have guaranteed large amounts of structured finance securities that were backed by subprime assets. Their exposure, Ackman said, is similar to that of Merrill Lynch & Co Inc MER.N and Citigroup (C.N), two banks that suffered massive subprime related write downs.

But the insurers have relatively low amounts of capital, so a few big bond defaults could cause them big trouble, Ackman said.

Shares of MBIA have fallen nearly 60 percent this year, while Ambac's shares were down almost 75 percent.

On the New York Stock Exchange on Wednesday, Ambac's shares rose 2.34 percent to close at $22.30, while MBIA's shares closed down 0.59 percent at $30.28.

Ackman clarified that bond insurers have holding companies and insurance subsidiaries. It is the holding companies that his firm is short.

Many investors expect bond insurers to boost capital in coming months through moves including insuring fewer new bonds, buying reinsurance on their risk, and potentially raising equity capital.

Ambac Chief Executive Robert Genader said at a conference on Wednesday that his firm does not plan to raise equity capital unless rating agencies signal the company should do so.

One insurer that is unlikely to raise the capital it needs is ACA Capital Holdings Inc, ACA.N according to Ackman, who expects the company to go bankrupt.

Representatives of ACA and Ambac, who were each called twice, were not able to supply a comment.

ACA Capital has written protection on some $68 billion of repackaged debt known as collateralized debt obligations. The market prices of those assets have suffered recently in part because of concern about the subprime mortgage crisis. ACA posted a $1 billion loss in the third quarter.

PROFITS FOR CHARITY

Ackman said his firm has already made a lot of money on shorting the bond insurance sector. He pledged to give all future profits he personally earns on the position to Pershing's charitable arm.

"If MBIA blew up, Pershing would make around $400 million to $500 million," he said.

Bond insurers for decades insured mainly municipal bonds. But in recent years, most of the profit growth in the industry has come from insuring bonds backed by consumer debt.

These asset-backed securities and collateralized debt obligations have declined in value this year, spurring billions of dollars of writedowns at banks ranging from Citi to Merrill Lynch to Wachovia Corp. WB.N

That could eat into insurers' capital. Ambac CEO Genader said Ambac can boost its capital levels through measures including changing its mix of business, writing fewer new policies, and buying reinsurance.

(Reporting by Michael Flaherty and Megan Davies; additional reporting by Dan Wilchins; Editing by Toni Reinhold; Tel +1 646-223-6152) Keywords: ACKMAN BONDINSURERS/