MBIA Inc. (NYSE: MBI) is now appealing to lawmakers to stop the decline in its stock price. The troubled bond insurer submitted written testimony for a subcommittee of the U.S. House Committee on Financial Services arguing that lawmakers should step in to curb the “unscrupulous and dangerous market manipulation of short-sellers”. MBIA specifically mentioned Bill Ackman’s Pershing Square Capital Management hedge fund, which has not only been the most vocal short-seller in the market but also increasing its short position every week. Are short-sellers to blame or are they the ones who have been right all along?

Bill Ackman has been bearish on MBIA for around five years, warning investors back in the 90s that the company’s collateralized debt obligations (CDOs) may put its Triple-A rating at risk. The activist hedge fund also brought up several “questionable transactions” that involved insuring a loss after the loss and then collecting on the insurance. Ackman even decided to write a 60-page paper entitled “Is MBIA Triple A?” in December 2002 shortly before these problems began. Now, after the CDOs have collapsed, and the company paid a fine for those questionable transactions, the stock is down more than 80 percent and all they can do is complain to regulators.

Bill Ackman estimates that the bond insurer faces more than $11 billion of potential losses, which would make it nearly impossible to avoid bankruptcy if it does not find a substantial amount of outside capital. However, MBIA argued in this letter to regulators that the model and data used in this analysis was flawed. In particular, Ackman used a random assortment of 1,267 securities to estimate losses while MBIA used a loan-by-loan analysis to make their estimates. Ackman also took a particular interest in the holding companies, reasoning that if the bond insurers’ holding companies were deprived of cash flow, their ratings would fall, and their operating units’ ratings would fall as well. The company complained that this meant he had no real interest in “saving bond insurers” as he once said.

In the end, Bill Ackman has been proven right so far while MBIA has repeatedly had to restate losses. As a result, many investors are beginning to trust the former more so than the latter. It will be interesting to see if the company receives any support from regulators or other parties to bail them out or meets the fate the Ackman has been predicting all of these years - bankruptcy. For now, it appears that it is on that track until it can actually report a decline in the amount of losses that it is posting from bad CDOs and mortgages. Regardless, this is a stock that is definitely worth watching over the next few months!

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