While the Dow Jones Industrial Average's 302.89 point gain to 11,734.32
on Friday may have put a little weekend spending cash in investors'
pockets, activist investor Bill Ackman of hedge fund Pershing Square
Capital Management LP may have a little less reason to celebrate as two
of his short-selling targets, bond insurers MBIA Inc. and Ambac
Financial Group Inc., each recorded double-digit gains over the past
week on surprisingly strong earnings.
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The largest bond insurer, MBIA, climbed 3.5% Friday and over 18% for
the week to close at $8.57 per share on news of a gain for the first
time in four quarters. Its net income for the second quarter hit $1.7
billion compared with $211.8 million for the year-ago period driven by
$3.3 billion in unrealized gains on insured credit derivatives.
Toxic
structured finance products driving gains? Aren't these the same
investments that drove the ratings agencies to downgrade a number of
bond insurers and have led to massive write-downs?
A number of media
outlets, observers and members of the blogosphere said the gain was due
to new tricky accounting rules. An article on Forbes.com
Friday said the Street's reaction to MBIA's earnings may be
"ill-conceived if it is based on the higher-than-expected profit" due
to recent accounting rules changes, MBIA has factored its own credit
risk into its valuation of its insured credit derivatives. The increase
in perceived credit risk, implied by its wider credit default swap
spreads, resulted in a decline in the value of its insured credit
derivatives. One reader responding to a MarketWatch
report on MBIA's gain put it more simply by saying, "Don't be fooled by
them. They make some debts default so they can increase the value of
some CDOs (collateralized debt obligations), just a big accounting
trick!"
Ambac, despite sliding 5.66% to close at $4.33 on
Friday, was up just over 18% for the week. Ambac soared nearly 24% on
Wednesday as it reported its first bottom-line gain in four quarters,
also driven by unrealized credit derivative gains. The monoline also
announced plans to launch a municipal bond insurance subsidiary in the
fourth quarter pending regulatory approvals are moving forward.
One
activist investor that did have reason to celebrate Friday was Vector
Capital, as software security company Aladdin Knowledge Systems Ltd.
ticked up 6% to close at $10.25 following the the investor's late
Thursday 13D filing in which it disclosed plans to push the company to sell, merge or inject Vector's own capital into the business. - Michael Rudnick
