Business

WARBURG TAKES BATH ON MBIA STAKE

Warburg Pincus’ $800 million investment in troubled monoline insurer MBIA is teaching private-equity firms and hedge funds alike a valuable lesson: Bottom fishing can be risky business.

What more than six months ago was greeted with applause on Wall Street is proving to be anything but praiseworthy for Warburg these days. According to its most recent quarterly performance report, which was obtained by The Post and covers the three months ended March 31, Warburg took a $215 million writedown on its MBIA stake.

That’s a far cry from the total of $800 million that Warburg invested in MBIA in exchange for a 25 percent stake in the insurer, whose business it is to guarantee the performance of various debt securities, ranging from municipal bonds to esoteric instruments backed by mortgages.

The MBIA position accounts for the single-largest investment in Warburg’s investment vehicle known as Warburg Pincus Private Equity X.

At the time that Warburg made its first investment in December, MBIA shares were trading at $30. Since then, a collapsing debt market and persistent questions about MBIA and its competitors’ financial health have sent the sector reeling, with MBIA shares cratering nearly 90 percent.

Yesterday, MBIA shares closed at $3.91, down 3.5 percent.

Warburg’s experience with its MBIA stake is a stark reminder to private-equity and hedge-fund players consumed with trying to bottom fish for investments that have been battered during the mortgage-inspired credit crisis.

Insurance firms such as MBIA and Ambac Financial were once a little-known cottage industry on Wall Street, but have come into the spotlight over their ability to make good on policies that they have underwritten to protect against losses in mortgage-tainted securities.

However, MBIA has been whipsawed by worries sparked primarily by activist hedge-fund investor Bill Ackman, who runs hedge fund Pershing Square Capital, and has bet the company will go bankrupt – even as the company boasts of its ability to raise capital to build up reserves against losses.

Calls to Warburg representatives and MBIA officials were not returned.