Filed under: Deals, Industry, Merrill Lynch (MER)
In a move that may represent a victory of hope over reason, Davis Selected Advisers has disclosed that it now owns 5.1% of MBIA, Inc. (NYSE: MBI).
On paper, the stock does look cheap, and Davis could claim to be something of an expert on financial shares having just put money into Merrill Lynch & Co., Inc. (NYSE: MER). But, Merrill is almost certainly the safer bet. Its business is spread across a number of sectors of the industry, from retail brokerage to mergers and acquisitions (M&A) work. MBIA is a bond insurer in a perilous bond market. And, it is a company which faces potentially ruinous downgrades from major credit agencies.
According to TheStreet.com “Fitch stated MBIA needed to shore up $1 billion in capital in the next four to six weeks to avoid a downgrade. That’s on top of the $1 billion investment from the private-equity firm Warburg Pincus that MBIA secured earlier this month.” If mortgage-related securities write-offs continue at big banks and investment houses that $1 billion might be hard to come by, or, it could represent significant dilution for MBIA’s current shareholders. The firm’s market cap is already below $3 billion.
The Davis investment looks like a loser, at least in the short term. MBIA shares are down by two-thirds from their 52-week high. A downgrade of its “AAA” rating by a bond agency would seem possible, if not probably.
Davis may have to sit on its MBIA shares for a very long time.
Douglas A. McIntyre is an editor at 247wallst.com.
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