NEW YORK (Reuters) - MBIA Inc plans on Thursday to urge lawmakers to curb the short-sellers beating down its stock, and to push rating agencies to revamp how they assess bond insurers.
In written testimony for a subcommittee of the U.S. House Committee on Financial Services, MBIA said lawmakers should help restore confidence in the bond insurers, because their failure could have far-reaching effects on the U.S. and global economies. Reuters obtained a copy of the testimony, which is for a hearing on Thursday.
Short sellers like Bill Ackman, founder of hedge fund Pershing Square Capital Management, have worked hard to undermine market confidence in the bond insurers, wrote MBIA, whose shares have fallen more than 80 percent since the start of 2007.
It isn’t the first time tensions between short sellers and the companies they target have escalated into public feuds. Online retailer Overstock.com has sued research firm Gradient Analytics and hedge fund Rocker Partners for allegedly joining forces to drive down its share price.
MBIA wrote that the House Subcommittee on Capital Markets should work with the Securities and Exchange Commission to “curtail (short sellers’) unscrupulous and dangerous market manipulation activities.”
Bond insurers are expected to make big payouts after insuring repackaged subprime mortgage and other risky debt. Those expected losses are eating into MBIA’s capital.
The three major U.S. credit rating agencies are deciding whether MBIA has enough funds available to pay off expected obligations.
If MBIA doesn’t have enough capital, it may be stripped of its top debt ratings. The world’s largest bond insurer said it expects to find out within four weeks whether it will retain the “triple-A” ratings crucial for winning new business.
Although MBIA believes it has enough capital, “the standard has been somewhat of a moving target,” the testimony said.
The changing standards have reduced the market’s confidence in the insurers, MBIA said. The insurer said industry leaders like MBIA should help the rating agencies redesign their systems for assessing bond insurers’ creditworthiness.
One way for bond insurers to maintain top ratings for at least a portion of their portfolio would be municipal bond reinsurance. Warren Buffett said on Tuesday that his Berkshire Hathaway Inc has offered to shore up $800 billion of relatively safe municipal bonds guaranteed by MBIA, Ambac Financial Group Inc and FGIC Corp. Ambac and at least one of the other insurers turned him down.
MBIA’s shares rose 14 cents on Wednesday to close at $11.64 on the New York Stock Exchange. The stock rose further after the close, when the bond insurer said it had closed on a sale of shares, which generated $1.1 billion of proceeds.
Mimi Barker, a spokeswoman for rating agency Standard & Poor‘s, declined to comment on testimony she had not seen. Moody’s Investors Service and Fitch Ratings were not immediately available for comment.
Lawmakers must support capital raising efforts of the bond insurers, because failure could have “far-reaching effects on the U.S. and global economies,” MBIA wrote.
Losing “triple-A” ratings would be bad for MBIA and for markets, because investors that can only hold top-rated securities may be forced to dump their insured bonds. Borrowing costs for city governments and consumers could rise.
MBIA’s expected losses spurred it to raise around $2.65 billion of new capital. The company is also cutting its dividend, slowing new business activity and buying reinsurance to preserve $500 million more.
Amid concerns about the market impact of downgrades, New York State Insurance Superintendent Eric Dinallo has met regularly with banks, insurers and others to organize rescues for companies including Ambac and FGIC.
MBIA faulted what it called “the unscrupulous and dangerous market manipulation activities of short sellers,” trying to undermine market confidence in MBIA to drive the company’s share price to nearly zero.
It said the practice and dissemination of “half-truths and misleading information” should be “investigated and curtailed,” and called on Congress to work on the matter with the U.S. Securities and Exchange Commission.
MBIA specifically faulted Ackman, and included as an appendix a timeline of actions by Ackman, and to a lesser extent by other short sellers.
Ackman did not return a call seeking comment, but in testimony that he plans to give on Thursday, he said, “The poor decisions of (bond insurance) holding company executives are the primary cause for the bond insurers’ problems, but the rating agencies also share responsibility.”
Reporting by Dan Wilchins, editing by Leslie Gevirtz, John Wallace, Richard Chang