S&P Rating Action Thoughts

So what are my thoughts on this whole MBIA and ABK thing? Well, I am a house divided. First the whole thing is a scam. I do not think there can be anyone who really can seriously analyze this and not think it is the emperor with no clothes. Look at the bare bone facts. On December 12th 2007 Pfizer lost its AAA rating. What is wrong with Pfizer. Well they are facing patent expirations through 2012 and have a weak pipeline. Oh but they have over 25 Billion in cash, buying back stock, and recently raised their dividend. Their are risks going forward but they are in excellent, excellent financial condition. Look at MBIA or ABK. MBIA is tottering on the brink of insolvency (the AAA rating is keeping that from happening), has had to suspend its buyback, announced today it suspended its dividend, needed to have raised over 2 billion in capital in the last few months to stay afloat, and rumors of a bailout are constantly floating around. Sounds AAA to me right. I mean definitely worse than Pfizer. The definition of AAA is something like above 99.7% (forget the exact number might be 99.9%) chance of not having a credit default. Yeah MBIA is prototype AAA. If that isn't absurd enough. Think that Berkshire Hathaway and MBIA both share the same rating.

So as a MBIA short and being overall negative bias on the market this show and pony game drives me nuts. It adds stress and forces me to spend at least some time thinking about probabilities of non fundamental events because perception can turn into reality even if it isn't reality. The other part of me sees no alternative. I mean can S&P really cut them?? I mean really. I know some of you disagree with me on this but MBIA and ABK blows up and the results I think are nuclear fallout. Look at the auction market last week. How in the world could that have been predicted? What looks on the surface as something totally insulated and safe suddenly blew up on concerns at least partially driven by these guys. What happens if these fears are realized. So what if most muni bonds are already trading unwrapped? There will still be major fallout. So as an individual living in America where my future for the most part is tied to America shouldn't I applaud S&P's actions even if I know it is a farce? I mean what is the worst that happens from this? The decline continues to be slow and painful and will end up where it would end up anyway? But time buys optionality and optionality buys more time. We probably are headed towards a Japanese slow meltdown that will be long and slow and put us in muck for years but millionaires and billionaires were made in Japan during this time. Isn't that a better option than a complete blow up of our financial system?

From my short perspective, MBIA may end up being a zero 18 or 36 months from now instead of 2 months or maybe I am forced to cover. I was sitting on a huge alpha gain today until 1:15 p.m. and then ended up with a huge alpha loss. Still as much as I know it is a lie, as much as I think it is manipulation, as much as I hate the smoke and mirrors in this case maybe John Lott's utilitarian approach is the right one. The greatest good for the greatest number.