By Robert Folsom, EWI | 2 February 2008
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On this page yesterday, I noted the relative speed of the reaction to the subprime crisis by the White House, Congress, and Federal Reserve. I also said I would discuss a possible answer to why their reaction has been so speedy. Events today actually got ahead of me, via the announcement that eight large banks have come together to "rescue" Ambac Financial— it's one of the two major bond insurance firms I mentioned yesterday, whose business is to guarantee mortgage backed securities.
I also said I'd read up on the claims and research of investor William Ackman, who had alleged that Ambac and MBIA do not have sufficient capital to cover the subprime-related claims that they face now and in the near future. In fact, Ackman has scrutinized these companies— and the bond insurance business generally— for more than five years. His research has been motivated in part because of the short position he took against the companies, although he has persistently and publicly spoken out about the problems he found. Ackman's claims have frequently spurred regulators to act, which in one case led to MBIA having to "pay $75 million to settle U.S. regulators' inquiries." (Bloomberg)
The share prices of MBIA and Ambac have collapsed, which speaks clearly enough to the wisdom of Ackman's short position. It's equally clear that his criticisms of the bond insurers have been at least partially vindicated by the "rescue" of Ambac. So: What has all this to do with why the politicians and central bankers have been trying to look less like the tortoise and more like the hare?
Well, could it be that one maverick investor isn't the ONLY person who has now done enough of the math to realize how serious the subprime crisis is? Sounds plausible to me, but just to be clear— this is an inference, not a claim of knowledge. What I DO know is what anybody will know who takes the time to read the facts: Ackman has been right so far, and in more ways than one.
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Normxxx
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