NEW YORK (HedgeWorld.com)–Hedge fund manager Gotham Partners Management Co. LLC issued a research report on its web site arguing that MBIA Inc., doesn’t deserve its triple-A rating.

MBIA disputed the conclusions of the report in its own release, and its chief executive hinted in a speech that Gotham’s motives are less than pure and potentially illegal. (Both MBIA’s response and Gotham’s report are available through MBIA’s web site.)

Gotham’s argument is that MBIA is not in as good of shape as investors and ratings agencies believe, meaning that its stock could fall even further than it has this year. The stock recently traded at about US$46 a share, down from its 52-week high of about US$60.

Gotham believes MBIA’s leverage is unduly high, losses have been greater than disclosed, and a relatively small amount of losses could lead to a downgrade of the company’s rating. A downgrade would potentially disrupt MBIA’s entire business, which is to provide insurance to bonds and structured notes, often leading to a AAA rating.

Much of Gotham’s argument revolves around special purpose vehicles that have not been on MBIA’s balance sheet, but will be moved there, MBIA officials say. “We believe that if investors were to become aware of the quality of the assets in the SPVs, they might not be willing to purchase commercial paper or medium-term noted backed by the assets,” Gotham wrote in its report.

MBIA’s published response to the report was short on specifics, but clearly disagreed with Gotham’s conclusions. MBIA Chairman Jay Brown said in the statement: “Many of the points raised in the Gotham report are patently wrong, and demonstrate a clear lack of understanding. We stand firmly by the soundness of our book of business and the quality of our underwriting.”

Later, at a conference sponsored by Keefe, Bruyette & Woods Inc., New York, he said there was nothing new in Gotham’s report: that they run a complicated business predicated on skimming a small amount of money from security issuance. “This is what I do for a living. It’s complicated,” he said. But he pointed to MBIA’s track record of success over 30 years in being very picky at choosing issues it guarantees. “Our goal in life is to do it right every time,” he said.

But he also indicated he’s not happy that a hedge fund manager can bash a public company after taking positions that would benefit it. “If you work for a major investment house and did that, you’d probably be talking to your attorney about front-running …” he said. “I don’t think it’s right; maybe it’s legal,” he said.

Officials for both MBIA and Gotham didn’t return phone calls for comment.

PBarr@HedgeWorld.com