Berkowitz's Case for MBIA

Fairholme Capital, advisor to the  Fairholme Fund (FAIRX), has filed a schedule 13-G with the SEC showing it owns nearly 23 million shares of  MBIA (MBI). That's big news for MBIA shareholders, but hardly earth-moving for Fairholme's. The $150 million stake equates to 11% of MBIA's market cap, but doesn't quite reach a 1% position in the $15 billion Fairholme.

Berkowitz spoke with Morningstar Wednesday, spelling out his case for MBIA.

Simply put, he thinks the firm will survive and slowly rise from the ashes. He says it is honoring its guarantees, making payments to those that have insurance with it. The firm reconfigured itself last year, splitting off its muni-bond insurance segment into a new unit. This good bank/bad bank approach provides flexibility, says Berkowitz. The move has triggered litigation by other investors, but Berkowitz says the New York Insurance Department gave its blessing, and he doesn't see that changing.

Berkowitz says MBIA provides a valuable service that still has some value. He acknowledges that new issuance of insured muni bonds has plummeted, but he says past bad behavior in the industry doesn't completely nullify the need for muni-bond insurance. Awful municipal balance sheets and falling public revenues may juice defaults but will also lead to better pricing, according to Berkowitz. And when the economy finally recovers, any policies written now and in the near future will be lucrative.

Berkowitz also has a comfort level with Joseph "Jay" Brown, who returned as CEO in 2008. He says he has followed Brown for 20 years, since his days as the successful CEO of Fireman's Fund, and has confidence in him.

Still, at 1% of Fairholme assets, this is a tiny bet by a manager who regularly builds positions nearly 10 times that size.