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As Bank Of America Implodes, Is MBIA A Volkswagen-Like Short Squeeze Candidate?

Tyler Durden's picture


When it comes to playing the endspiel for Bank of America, there are two binary outcomes: A) either the stock goes to zero in a slow, painful bleed, accompanied by periodic mega squeezes on headlines such as Buffett taking another bath; or B) the stock surges following some substantial government bail out and a quick and painless resolution of the mortgage putback litigation, the robosigning debacle, and somehow the bank finds a way to make money in an environment in which the 2s10s is about to tumble to record lows following the "Torque." As is well known, our personal belief is that all signs point to A) however with limited upside (one can only double their money by shorting) and a constant threat of short squeezes (hence unlimited downside), especially with the stock as depressed as it is and in this massively rigged and centrally planned market, puts a perpetual damper for those who wish to short the name to death. Which brings up an interest tangent: is there a way to profit from the collapse in Bank of America in a mirror image situation, i.e., with unlimited upside and limited downside? The answer is yes, and it very well may be in the form of MBIA, where as we indicate below, the upside may not only unlimited semantically, but practically as well, courtesy of shades of that most epic moves of 2008: that of the short squeeze in Volkswagen stock. Is there a chance that MBIA, with its 27 million short interest, and its 98% long institutional ownership could be the next Volkswagen? Perhaps. Read on.

To paraphrase the core argument from the previous paragraph, the question is who will be the biggest beneficiary from mortgage putback litigation over time. The fact is that MBIA is likely to get between $3-4 billion from Bank of America alone versus its current market cap of $1.5 billion. Recall that Assured Guaranty got $1.6 billion from Bank of America versus its current market cap of $2.4 billion.

Some fundamental bullets:

  • FHFA lawsuits lend credence to MBIA’s claims against banks over reps and warranties
  • MBIA could and likety should recover close to $4-5 billion from seller/servicers over reps and warranty violations. Those recoveries alone would nearly triple the stock price of MBIA on a dollar for dollar basis.
  • MBIA’s Chief Executive Jay Brown is a significant shareholder – owns 4.4 million shares; his most recent purchase of $1,000,000 of stock was on 09/02 @ $7.60. 

Digging through the technicals is where this gets interesting:

  • MBIA is heavily shorted – 27 million shares short (see below); 50% of the stock is held by 2 investors and the remaining 50% is held by a very concentrated group of holders, for total institutional ownership of just under 100%.
  • In 2009, when hedge funds were short Volkswagen, a short covering rally made Volkswagen shares rise to nearly €1,000 giving Volkswagen the biggest market capitalization in the world
  • If MBIA has success in litigating its putback suits,  short sellers will be unable to find enough shares to cover:
  • 27mm shares short, 99% of stock held by institutions; heavy concentration amongs holders
  • There are various floating rumors that Bank of America and MBIA have reached a preliminary settlement agreement
  • And even without a positive catalyst, all it would take for a massive spike is for a "cabalistic" decision among the biggest concentrated holders to pull the borrow on the stock, and to force shorts to cover as the stock goes from HTB to Recalled.

MBIA short interest has been creeping higher:

Chart: Bloomberg

Institutional holders: Top 30 account for 96% of the stock.

In other words, form a risk return, standpoint, those who live and breath each day to see Bank of America destroyed have two options: either short the name, risking lots of premature gray hair, or lock their downside with a long bet in a stock that has the potential to challenge Volkswagen in one of the most powerful short covering rallies ever, with or even without a direct catalyst.

And in terms of an immediate catalyst, keep an eye on the legal situation in court, which as we discussed previously is poised to make a decision on whether the Article 77 status of the settlement is to be unwound by pushing the case to Federal court (discussed here), and the outcome will be known within a few weeks (as summarized by Reuters). Should the case go "federal" it will be a huge win for MBIA and plaintiffs, as it would essentially allow everyone and their grandmother to submit a legal claim, hence commencing the terminal bleed by a thousand lawsuits, which will strengthen the case for monolines such as MBIA substantially.


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Thu, 09/15/2011 - 14:46 | 1674213 Popo
Popo's picture

BAC is imploding?  As much as I hate to see it,  it's up today...

Thu, 09/15/2011 - 14:49 | 1674215 SheepDog-One
SheepDog-One's picture

Did you even bother to read the article?

Thu, 09/15/2011 - 14:48 | 1674219 Tyler Durden
Tyler Durden's picture

The battle of the short squeezes. Note the speculation that BAC would spike before it implodes. Point being that the MBIA short squeeze will make that of BAC seems like child's play.

Thu, 09/15/2011 - 14:51 | 1674223 SheepDog-One
SheepDog-One's picture

Which is why shorts are really on my very last frayed nerve these days. Yea shorts are everywhere piling into everything to ensure right when the markets are caving in on themselves, they privide the fuel for yet another short squeeze.

...hey shorts, PISS OFF!

Thu, 09/15/2011 - 15:36 | 1674362 BandGap
BandGap's picture

This should cheer you up in a hurry.

Thu, 09/15/2011 - 14:53 | 1674229 GeneMarchbanks
GeneMarchbanks's picture

Everyone and their Mother is short BAC. A reversal? Maybe. Gang rape is on.

Thu, 09/15/2011 - 15:48 | 1674422 spiral_eyes
spiral_eyes's picture

I'm not short BAC, because I don't give a fuck about doubling my fiat money on betting against stocks Benny & Timmy can magic to infinity, when I could instead put my money into precious metals that are going to go up way more than 100%. 

Thu, 09/15/2011 - 14:54 | 1674232 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

As you know T. D. BAC is part of owner of the privately held Federal Reserve.  A merger with another syndicate bank is more likely probably along with a run up in BAC stock beforehand.  There is no way in hell they will let it implode for the whole world to see!  "Evil goes to darkness"!

Thu, 09/15/2011 - 14:56 | 1674236 Michael
Michael's picture

It's your fault ZH, CNBC hosts are all jumping around like their in a Gorilla Trade commercial with their arms and limbs all flailing around.

That's because they know we only watch their channel on mute now.

Thu, 09/15/2011 - 14:57 | 1674239 There is No Spoon
There is No Spoon's picture

looks like you may have initiated a bit of covering already

Thu, 09/15/2011 - 15:47 | 1674410 Libertarians fo...
Libertarians for Prosperity's picture



Yep.  This article was released at 2:44.  Look what happened over the next 20 minutes.  

Looking at a minute chart, this stock usually trades ~2k, 3k, 4k shares.  For no reason, suddenly there's 40K and 80K blocks going through.  


Nice one Tyler.  


Thu, 09/15/2011 - 16:17 | 1674561 IQ 145
IQ 145's picture

No kidding? Well, I be damned. Tyler's a market mover. What next?

Thu, 09/15/2011 - 15:42 | 1674385 jdelano
jdelano's picture

big fan--but really seems like tylers pushing their own book today with the flurry of articles subliminally enticiing you to join them in the short squeeze play, which is really just piggybacking HFT's.  Come on Tylers, no sleeping with the enemy.   

Thu, 09/15/2011 - 16:16 | 1674552 IQ 145
IQ 145's picture

Mkaes perfect sense to me. Somebody ought to pay you for doing this.

Thu, 09/15/2011 - 18:01 | 1675055 myne
myne's picture

Tyler, hyopothetically, how would one best go about naked short selling all the banks to zero - and not get caught?

Project mayhem was all about blowing up the banks and starting afresh. Wouldn't that be a very fitting end game?


Thu, 09/15/2011 - 19:51 | 1675469 SolidSnake961
SolidSnake961's picture

the short squeeze of VW was during 2008 not 2009

Thu, 09/15/2011 - 14:52 | 1674228 Waffen
Waffen's picture

Indeed, I wish that ZeroHedge would be a little more selective/conservative in their thread titles.

Thu, 09/15/2011 - 15:05 | 1674234 GeneMarchbanks
GeneMarchbanks's picture

Today aside BAC is down rather big recently, no?

Thu, 09/15/2011 - 15:16 | 1674290 Captain Obviousness
Captain Obviousness's picture

zomg if a stock is up in one day that means the company is sound! 

as the article says, it is going to zero or bailout.  that said, i closed my short yesterday because a squeeze does seem imminent, not just in bac but equities as a whole.  this will not end well, but the roller coaster is too nauseating to stick around.

Thu, 09/15/2011 - 16:25 | 1674583 IQ 145
IQ 145's picture

Would the "roller coaster" be less nauseating if you got on the right side of something for a change? Probably so; eh? It;s a public market; you could buy a block of BAC and take advantage of the fact that its Too Big To Fail. Explanatory note; that means, it will not fail.

Thu, 09/15/2011 - 17:01 | 1674725 Captain Obviousness
Captain Obviousness's picture

I didn't know being short BAC for the last 6 months was the wrong side of the trade?  Just looks like it's going higher right now, that's all.  You're probably right it will be bailed out, but I don't want to gamble on a bankrupt company getting bailed out.  Too "nauseating" for me.

Thu, 09/15/2011 - 15:59 | 1674478 piceridu
piceridu's picture

read before commenting please

Thu, 09/15/2011 - 16:40 | 1674645 IQ 145
IQ 145's picture

closed at $7.31; 9%+overnight two to one margin.bought at 6.98. S&P went off at 1209. It needed a close above 1200;

Thu, 09/15/2011 - 17:08 | 1674751 Captain Obviousness
Captain Obviousness's picture

Congratulations on your day trading and gambling on central bank interventions.  It was over 15 in January.

Thu, 09/15/2011 - 14:54 | 1674233 DeutscheMark
DeutscheMark's picture

Great news. I bought 100 share at ~ $7, so I will get $100,000 back!

Man I'm such a player.


Thu, 09/15/2011 - 15:02 | 1674248 Belarus
Belarus's picture

The reason shorts are such weak hands is simply because they are puddy in central bankers hands for the time being. Therefore, shorts, at this juncture, while they don't know it, are longs in disguise. In other words, being short in here is for suckers....

Which gets to ZH's point, and a good one at that, long MBIA is the best way to short BAC if you play such games.

Thu, 09/15/2011 - 15:04 | 1674252 dax
dax's picture

credit wise there is a lot of short in BAC smells tightening on the way this will help the stock as well


Thu, 09/15/2011 - 15:05 | 1674253 ghostfaceinvestah
ghostfaceinvestah's picture

Why is this site pumping individual stocks now?

Thu, 09/15/2011 - 15:07 | 1674260 Tyler Durden
Tyler Durden's picture

Zero Hedge has never had a problem with exposing arbitrage opportunities, either to the long, short (chinese fraudcaps) or neutral (ES-risk) spread side. Furthermore, does it say anywhere one should be buying (or selling) MBIA stock. We tend to believe the majority of our readers (with obvious exceptions) can think for themselves.

Thu, 09/15/2011 - 15:12 | 1674274 ghostfaceinvestah
ghostfaceinvestah's picture

How is this an arbitrage opportunity?  MBIA's exposures go far beyond Cwide securities.


Thu, 09/15/2011 - 15:18 | 1674299 Bold Eagle
Bold Eagle's picture

Everything is arbitrage opportunity these days. If you hold positions overnight, good luck. I am very grateful to ZH for reporting these low-risk opportunities. Free money 90% of the time.

Thu, 09/15/2011 - 16:29 | 1674595 IQ 145
IQ 145's picture

It's true; he's an ace researcher  and he points out things I wouldn't run across in a million years.

Thu, 09/15/2011 - 15:15 | 1674286 GeneMarchbanks
GeneMarchbanks's picture

'We tend to believe the majority of our readers (with obvious exceptions) can think for themselves.'

Boom! That's your mistake right there. They are looking for trades not ideas. Like that sad bitch from UBS today and FOX news.

Thu, 09/15/2011 - 15:23 | 1674317 What_Me_Worry
What_Me_Worry's picture

I'm going to put my whole kids' college fund in MBI OTM calls.  If it loses, I will ground them for being "rogue traders"

Thanks, ZH!

Thu, 09/15/2011 - 16:27 | 1674592 IQ 145
IQ 145's picture

!!! Way to go, Bippy.

Thu, 09/15/2011 - 15:37 | 1674369 SheepDog-One
SheepDog-One's picture

Like the SAT score chart, when ZH got rid of CAPTCHA math problems some of the posts have been more Yahoo! Finance level. 

Thu, 09/15/2011 - 15:31 | 1674335 Stack Trace
Stack Trace's picture

TD, please keep the ideas coming including trades. I have learned more from this site in 10 weeks than years of reading MS. (not that I trade on trades you suggest. Just interesting to see alternate approaches to trading)

I am guilty of shorting financials using FAZ the last few weeks and I have been pattern trading between that and squeezes/melt ups with long positions in XLF and some bank stocks. (blush)

However, I mostly hold physical gold and some paper gold (phys) as well as cash. I am watching this latest downturn as an opportunity to buy a dozen ozs with my bank shorting profits.

Anyway, time to donate to your site. I did buy your shirts and everwhere I go people ask about ZH. P.s. My wife and I body-build as a hobby so your shirts are well represented. :-)

Thanks for providing alternative analysis to the crap spewing out of the big WS sell-side machine.

Thu, 09/15/2011 - 15:45 | 1674402 ghostfaceinvestah
ghostfaceinvestah's picture

BTW who is Menal Mehta and why was his original h/t removed from the article?

Thu, 09/15/2011 - 15:17 | 1674296 I did it by Occident
I did it by Occident's picture




No, not #WinningtheFuture

the other one...

Thu, 09/15/2011 - 15:18 | 1674298 Maybe-Not
Maybe-Not's picture


what about MBIA exposure to muni's? Not disagreeing with above. I have been looking at MBIA for a month. I should have pulled the trigger a few weeks back:(

Thu, 09/15/2011 - 15:32 | 1674350 Belarus
Belarus's picture

There will not be any irreparable harm to munis--sorry Meredith. It's called ctrl + p. The fed's interns know the keystrokes well. So don't worry about that. 

Thu, 09/15/2011 - 15:24 | 1674323 Growyourownfood
Growyourownfood's picture

Actually, the fact that the major holders are concentrated makes a short squeeze less likely, not more likely. A fund such as fairholme which has massively underperformed this year is much more likely to unload half of its position in the face of any major rallies in onder to at least lock in some gains. The fact that their position is so large means that they are forced to make use of volume in order to exit it, and that same volume equally will serve to limit the etent of any potential surge in price due to short covering.

Porsche was a much different situation, as the major ownership overhang was strategic in the form of VW, so no such dump of stock occured. And it didn't squeeze at a time when funds were looking to lock in any profits they find anywhere.

Thu, 09/15/2011 - 15:30 | 1674344 Belarus
Belarus's picture

....Fairholme will die a death by a thousand swords before Bruce sells MBIA.  MBIA, per Bruce, would be the largest stock in his fund if his fund weren't so big--can't have a 1.5 billion dollar stock be the #1 holding in a $30 billion fund due to mere logistics. 

So, MBIA will be the last fucking thing this guy sells. FWIW.

Thu, 09/15/2011 - 15:32 | 1674349 Growyourownfood
Growyourownfood's picture

Yeah, you're right, it'll squeeze to $50 and he won't sell a single share. He'd rather let other people do the selling and end the year down 30. Good luck with that.

Thu, 09/15/2011 - 15:34 | 1674357 Belarus
Belarus's picture

$50 per share? I guess you proved ZH's point. LOL.

Thu, 09/15/2011 - 15:33 | 1674353 Iceobar
Iceobar's picture

...and my guess for that possible u/s target would be from 31.45 - 36.94

We'll see how that works

Thu, 09/15/2011 - 15:57 | 1674468 Chappy
Chappy's picture

If no one is shorting and the market goes down, what good does it do anyone?  I've had some success shorting stocks after the 10% rallies.  My track record on long bets is horrendous. 

Thu, 09/15/2011 - 16:22 | 1674573 Wes Mantooth
Wes Mantooth's picture

I don't understand this story. With Volkswagen, there was a 12% short interest with only a 5% float. Here you have 25% short interest on effectively a 50% float, which will not cause a squeeze. The hedge fund holders will be disciplined and will sell for a profit on a squeeze to make up for their terrible numbers this year. What Fairholme and Warburg should do is lend their shares out and then call them right back. That would cause a real squeeze.


Btw, hedge funds are anticipating that Fairholme is going to get big redemptions and are pounding their names with shorts. See Sears today to see what I mean.



Mon, 06/25/2012 - 23:27 | 2560481 ndrewoods
ndrewoods's picture

Same here. I can't infer from context. But something caught my attention, that Volkswagen is the biggest market capitalization in the world, is that a good thing or not? I mean, for the company. Well, I do hope to see fairly priced Volkswagen parts soon if they are really growing.

Thu, 09/15/2011 - 17:22 | 1674838 Ruffcut
Ruffcut's picture

So if Bac goes poop, then they pay mbi nadda. IF bac goes up to the moon, the chance of paying mbi, nadda still.

This bitch should of died years ago. It is the CDC warning of zombies.

Sorry, my balls are still in my ass from last time, to bank on zombies.

"Invest in this shitbag,because it is less shitty."

Thu, 09/15/2011 - 17:48 | 1674990 LeonardoFibonacci
LeonardoFibonacci's picture

Run pension funds! Run for your lives!  Pension funds remind me of junk food & they would probably respond by saying, " I can't run, I am full of hamburger!"  They are indeed the next target of the puppet masters........

Fri, 09/16/2011 - 00:26 | 1676133 gorillaonyourback
gorillaonyourback's picture

ok, i bite, on my radar,,,,, thx for the very inciteful opinion, it will be a joy to follow and hope your analytical skills will be rewarded

Tue, 12/13/2011 - 10:33 | 1973616 qussl3
qussl3's picture

Speaking of short squeezes.

Going into an FOMC where nobody thinks anything will happen, while having almost record short positioning in the EUR is obviously a good idea.

Do NOT follow this link or you will be banned from the site!