Greenlight's Einhorn still bearish on MBIA

By Dan Wilchins

NEW YORK (Reuters) - Bond insurer MBIA (MBI.N: Quote, Profile, Research, Stock Buzz) has a fundamentally flawed business model and its shares should fall over time, a short-seller of the company's shares said at the Reuters Investment Outlook 2007 Summit.

MBIA, which is under federal and state investigation for issues including its accounting practices, has polarized Wall Street portfolio managers.

About 14 percent of the company's shares have been sold short, well above the average for a New York Stock Exchange listed stock. Short sellers make a profit by selling borrowed shares and buying them back at a lower price.

David Einhorn, president of hedge fund Greenlight Capital, which has sold MBIA stock short, said the short interest makes perfect sense.

"There's a lot of business and financial risk here," he said on Monday.

But other investors aren't so worried and have sent MBIA's shares to all-time highs in recent sessions, including a 1.7 percent increase on Tuesday.

The insurer set aside $75 million in the third quarter of 2005 for expected costs linked to settling investigations into areas including its accounting for MBIA's loss in 1998 on bonds it insured.

Reserving those funds implied to many investors that resolution of regulatory problems was near.

Speculation that a settlement is near has lifted the company's shares in recent sessions, and they could rise even more when it actually happens.

"The shorts will get squeezed," said Howard Shapiro, a portfolio manager at KBW Asset Management in New York which owns MBIA shares.

When asked about the timing of a possible resolution, MBIA Chief Financial Officer Chuck Chaplin said, "We expect we will have a settlement soon," and adds, "we don't control the timing." Other insurers are also involved in the settlement, Chaplin added.

But Einhorn is sanguine about the possibility of a settlement, because he argues there are even deeper problems with MBIA that regulatory resolutions can't fix.

MBIA insures municipal bonds and asset-backed securities against default for issuers such as cities. Insured bonds carry higher credit ratings, which lowers borrowing costs for issuers.

Although MBIA's business model is predicated on its ability to better value risk than the bond markets, it's not clear that MBIA has an advantage in doing so, Einhorn said.

In addition, new accounting rules under consideration by the Financial Accounting Standards Board will cut into bond insurers' ability to recognize revenue, and affect MBIA's bottom line, Einhorn said.  Continued...