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.