MBIA Downgrades and Impact

For the super nerds or if you have a position in MBIA.

http://www.nakedcapitalism.com/2008/06/mbia-downgrade-increases-collateral.html

Ding Ding...Second Round...Moody's vs. MBIA

Man what a day and it isn't even 1:00 yet. I got in really late last night and was planning to take a short nap. So much for that.

If you haven't seen this that means in the last hour you haven't been following the markets.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAS6o7QliF8U&refer=home

The Aaa insurance ratings of MBIA Inc. and Ambac Financial Corp. are again under threat by Moody's Investors Service after the two largest bond insurers reported deepening losses from the mortgage-market slump.

and

MBIA Insurance Corp.'s insurance financial strength rating may fall to the Aa range, although a drop to the A category is possible, Moody's said in a statement today. Ambac Assurance Corp.'s ranking would probably be lowered to Aa, Moody's said in a separate statement.

Of course the credit default swap markets says it should be rated Caa1 at best. After this Jay Brown came out yelling foul on Moody's. They also said they still have the 900 million at the hold co level. A day after the earnings release, I think it was May 12th, they said they were moving all about 100 million down. Obviously they did not do it. I can't believe the NY Attorney General is not forcing them to move that down.

Probably one of the most important aspects of a downgrade is that it could turn a credit crises (for MBIA) into a liquidity crises (for MBIA) as they would be forced to bring forth more collateral. I read somewhere if S&P cut Lehman again it would require $5 billion more in collateral to be put up by Lehman.

One interesting thing is the markets reaction. It dropped and stopped the advance but for the most part the market has been able to ignore MBIA and ABK. In February it would have sent it down 300 points. The greatest systemic risk these two companies pose has probably has passed as some banks have started taking actions in anticipation of downgrade. More surprising to me is that LEH did not react at all. I figured the short would have been able to gain traction again pushing Lehman down.

I read this comment in the comments section of another blog. I thought it was hilarious.

In other news, Moody's is reviewing its ratings on Confederate war bonds. With negative outlook.

MBIA

The earnings came out from MBIA. No real surprises. Losses were massive but the status quo remains.

These losses, unlike Ambac, were well publicized on the street. This is why the stock is up today. My hope was the stock would open down 5% or more and my plan was to cover 30 to 50% of my short position. After Ambac and AIG I thought no matter what the news was it was going to be sell the rumor buy the news type of reaction from Wall Street. Sure enough that is what happened and unfortunately I didn't even get my 5% drop at the open.

I am once again in awe of how MBIA has managed (manipulated) the street. As much as I can't stand the management and think is borders on illegality, they should be a case study for all Harvard MBAs who may go and be a CEO for a Fortune 500 company.

If you remember they raised $1 billion in the latest fund raising to keep there rating. Well it came out last week that they still held that money at the holdco level instead of passing it down to the insurance level. This infuriated alot of people because the money was raised to keep their rating and then they didn't move it to support those operations that depended on the AAA.

Well what they did was pure genius. They leaked that information out last week before the earnings release. Some people were up in an uproar. Then after this earnings release they announce they will move $900 million of it into the insurance unit. This creates the illusion that they just added capital in response their losses and so shouldn't be required or don't need to raise additional capital. It also quites those individuals who were upset at them not moving the money to the opco level originally. If they would have moved that money when they were supposed to and then announced a large loss those people would be screaming about MBIA needing to raise more capital. Now any such chatter is immediately squelched with a quick response pointing to the fact that"well no, MBIA just moved 900 million to the opco level. They are fine."

The other thing is the CEO Jay Brown keeps pounding on their liquidity situation which diverts the attention completely away from the solvency issue. First they only have an ample liquidity situation because the rating agencies will not (can not) downgrade them and because they are not writing much new business. Once again though this is masterfully spun.

At least from me, no real surprise about the numbers or the stock price reaction today.

Also if management was as good at making money as they are at surviving and managing the street I would load up the boat in whatever stock they were managing. You really have to be impressed.

Quote of the Day...It's not even 9:00 a.m.

MBIA are such squirrels. They know how to work the system and survive, I will give them that.

CEO quote from the press release which I am making the Quote of the Day.

http://biz.yahoo.com/ap/080507/mbia_letter.html?.v=1

"I continue to believe that investors in MBIA should understand that this number is nothing more than a barometer of credit market sentiment and market liquidity or illiquidity and does not accurately reflect the actual losses that would be expected at MBIA," Brown said in the letter.

This number I am sure refers to earnings number coming out next week. Okay so the number is going to bad, sounds like really bad, but everyone should ignore it. It is meaningless because of market sentiment. That may actually be legitimate if Ambac had not seriosly upped the actual losses number they now expect. Then also this.

Bond insurer MBIA Inc. says it has the liquidity it needs in its insurance and asset management segments and won't spend the $1.1 billion it raised until it boosts capital in the insurance unit and decides how it will run the business long-term.

How ridiculous. Yeah you don't need the capital. YOU HAVEN'T BEEN DOWNGRADED and you aren't writing any substanital new business. You don't need the capital until you have to post additional collateral if you actually were writing substanial business or you were downgraded and you are not being downgraded because you would wreck the system. Yet somehow this is all supposed to be a sign of strength.

Talk about twisted.

I have made alot of money on this as a short but it has to be the most frustrating short I have ever been in.

MBIA Downgrade

MBIA downgraded?? In case you missed it, don't feel bad. Two months ago you would have thought the world would have fallen apart if MBIA would have been downgraded. Now it happens during the trading day and the market ignores it just like it did the horrendous employment data. In fact I did not see it until about 5:00 p.m. on Friday!! I am short MBIA and was at a computer all day glancing at CNBC off and on and it was just not mentioned (at least not that I saw). When I found out my jaw dropped. I couldn't believe it.

There are a couple of reasons why it was ignored, none of them legitimate but it is the signs of the times. One is that Fitch has become the red headed step child of the bunch. Now correctly but they are saying things no one like to hear so they are being ignored. They have always been the smallest of the three but given as much credibility as the other two until they have started saying things that investors and companies do not like to hear. If things become really bad they will be in prime position to benefit as the next time around they may be the only one's standing of the three and will for sure have very high credibility. If things turn out okay they will lose market share and no one will want to do business with them even if MBIA is technically AA and not AAA. Because they stepped out and said look they are AA, if MBIA survives people will remember that not looking upon it kindly if they know they were right and Fitch will be punished as a result. Right or wrong that is the way Wall St. works so Fitch is taking a pretty big gamble.

The other reason why it was probably ignored was because MBIA and Fitch have already had a falling out so there is bad blood. Fitch was calling foul when MBIA was acting like everything was okay and MBIA did not like it. So if you remember MBIA asked Fitch to stop rating them. Fitch said no we will continue doing it and we will do it for free. MBIA screamed bloody murder.

Anyway I think this is more evidence of potential problems looking forward and gives me more conviction in not buying aggressively this latest rally.

Also, by the way, that "reasonably" big toll road bond they insured, yeah well reasonably was a definite qualifier.

http://biz.yahoo.com/bw/080403/20080403005866.html?.v=1

MBIA Insurance Corporation, a subsidiary of MBIA Inc., today announced it has guaranteed $373 million of a $3.0 billion bond issued by the North Texas Tollway Authority.

Yeah, so around 13% of one of the larger bond deals done in the last 6 months. A year ago they would have easily gone well over 40%. Hardly something they should be excited about though if you haven't had food for a couple of days and the day old hamburger starts to look pretty good.

S&P Rating Action Thoughts

So what are my thoughts on this whole MBIA and ABK thing? Well, I am a house divided. First the whole thing is a scam. I do not think there can be anyone who really can seriously analyze this and not think it is the emperor with no clothes. Look at the bare bone facts. On December 12th 2007 Pfizer lost its AAA rating. What is wrong with Pfizer. Well they are facing patent expirations through 2012 and have a weak pipeline. Oh but they have over 25 Billion in cash, buying back stock, and recently raised their dividend. Their are risks going forward but they are in excellent, excellent financial condition. Look at MBIA or ABK. MBIA is tottering on the brink of insolvency (the AAA rating is keeping that from happening), has had to suspend its buyback, announced today it suspended its dividend, needed to have raised over 2 billion in capital in the last few months to stay afloat, and rumors of a bailout are constantly floating around. Sounds AAA to me right. I mean definitely worse than Pfizer. The definition of AAA is something like above 99.7% (forget the exact number might be 99.9%) chance of not having a credit default. Yeah MBIA is prototype AAA. If that isn't absurd enough. Think that Berkshire Hathaway and MBIA both share the same rating.

So as a MBIA short and being overall negative bias on the market this show and pony game drives me nuts. It adds stress and forces me to spend at least some time thinking about probabilities of non fundamental events because perception can turn into reality even if it isn't reality. The other part of me sees no alternative. I mean can S&P really cut them?? I mean really. I know some of you disagree with me on this but MBIA and ABK blows up and the results I think are nuclear fallout. Look at the auction market last week. How in the world could that have been predicted? What looks on the surface as something totally insulated and safe suddenly blew up on concerns at least partially driven by these guys. What happens if these fears are realized. So what if most muni bonds are already trading unwrapped? There will still be major fallout. So as an individual living in America where my future for the most part is tied to America shouldn't I applaud S&P's actions even if I know it is a farce? I mean what is the worst that happens from this? The decline continues to be slow and painful and will end up where it would end up anyway? But time buys optionality and optionality buys more time. We probably are headed towards a Japanese slow meltdown that will be long and slow and put us in muck for years but millionaires and billionaires were made in Japan during this time. Isn't that a better option than a complete blow up of our financial system?

From my short perspective, MBIA may end up being a zero 18 or 36 months from now instead of 2 months or maybe I am forced to cover. I was sitting on a huge alpha gain today until 1:15 p.m. and then ended up with a huge alpha loss. Still as much as I know it is a lie, as much as I think it is manipulation, as much as I hate the smoke and mirrors in this case maybe John Lott's utilitarian approach is the right one. The greatest good for the greatest number.

Mary Whitman and MBIA

http://www.thirdavenuefunds.com/taf/documents/shareholderletters/aboutus-letters-07Q4.pdf

Man I am just pouring on the posts today. I keep finding things I find really interesting. This is famed valued invesotr Marty Whitman's lastest letter. He has a large positions in MBIA and Radian. I have bet strongly against MBIA and so have been very curious at his bullish thoughts on the company. This really doesn't shed much light into that but it is interesting. Basically he just think there cheap compared to book. I still disagree with his assessment of MBIA and think book isn't worth his $.40 on the dollar.

Everything below is from the letter
THE RESIDENTIAL MORTGAGE MELTDOWN AND HOUSING COLLAPSETAVF is investing heavily in the common stocks of companies suffering through the current housing crisis. These companies include financial institutions, a homebuilder, a building supplier, land banks and investment builders. The Fund’s reasons for this investment program provide a good case study as to how Third Avenue’s “safe and cheap*” approach works in practice:First, the bad side of these investments:
1) The stock market pricing for these equity issues is chaotic. There is no way Fund management is able to pick a bottom for securities prices, or a near bottom.
2) Fund management has no good idea of how deep the crisis will become, or how long it will last. Our best guess is two to four years.

Second, the good side of these investments:
1) In each instance, TAVF is acquiring common stocks at meaningful discounts from readily ascertainable NAVs. In the case of certain financial institutioncommon stocks – MGIC Common, MBIA Common and Radian Common, the prices the Fundis paying are no more that 40% of book value, or adjusted book value. For each of these companies, a normalized Return on Equity (equity equals bookvalue) (“ROE”) ranges from 8% to 14%. Assuming a 10% ROE sometime in the future, and no further dramatic deterioration in book value during the interim, probably a realistic assumption; and current pricing at 40% of book value, Third Avenue wouldbe paying only four times future normalized earning power. There seems to be a reasonable probability, too, that TAVF is really paying less than four timesnormalized earnings, even assuming that future normalized earnings are fully taxed and even assuming some modest dilution of the common stocks.
2) Each common stock acquired, is acquired in a company which enjoys a strong financial position. While there can be no guarantees, the probabilitiesare that each of these companies will survive as solvent going concerns either without requiringmajor access to capital markets for new funding, or by obtaining new funding from others on terms that are only modestly dilutive for TAVF. On December10th, MBIA announced that it is obtaining $500 million of equity financing from Warburg Pincus; and another $500 million from a rights offering which Warburg Pincus will backstop, i.e.,underwrite. Assuming that Third Avenue participatesin the rights offering and also takes advantage of any oversubscription privileges, the capital infusion should be, at worst, only modestly dilutive for TAVF.
3) Each company seems very well managed.
4) It is possible that the crisis will become increasingly deep, and prolonged; or rating agencies will start to place great weight on soft, qualitative considerations. In those events, the companies might need capital infusions toremain going concerns. TAVF has proposed to MBIA, Radian and USG managements that such infusions be in the form of equity, and that existing stockholders provide the equity via pre-emptive rights offerings. MBIA proposes to raise $500 million via a rights offering. If this were to occur, and if other portfolio companies were to follow the MBIA path, the capital infusions would be, for Third Avenue, mostly nondilutive, or anti–dilutive (if there are oversubscriptionprivileges). In the case of MBIA and Radian, it is crucial if they are to remain going concerns, that the national rating agencies continue to assign AAA and AA ratings, respectively, to each company’s bond insurance subsidiaries. As an aside, given current prices, TAVF would probably not lose money if Radian or MBIA were to go into run-off rather than remain going concerns. Run-off, i.e., liquidation, simply is not a likely outcome, however

More MBIA / Ambac News

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3248731.ece

America's biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion, a leading ratings expert said yesterday.

http://www.cnbc.com/id/15840232?video=628365512&play=1

Sean Egan of Egan-Jones Ratings Co. talks about the $200 billion number in the video above.

This news combined with the thought the Fed may not cut as much after they were duped and the fact that we had a 6% monstrous rally in the S&P from bottom to top is sending the markets lower.

Like I said, I still don't see how equity holders in these companies get anything back.

MBIA and ABK

If you have not been following this both bond insures MBIA and ABK are up about 100% in the last two days. A post I did back in December said everything revolved around these guys. I think I am being proven right in that statement as losses accelerated last week after these guys look they were done and huge market gains today after regulators met with their counterparties potentially infusing $5 billion to $15 billion in capital in what amounts to a governement orchestrated bailout.

Couple of thoughts.

1) When in history has a government bailout amounted to anything substantial for equity owners? The 1998 liquidity crises centered around LTCM. That hedge fund blew up and the governement had to come in to lead a bailout (Wall St banks ultimately bailed them out). The point is the owners of LTCM got next to nothing. Same with the S&L crises. The governement came in and huge bailouts. Equity owners got next to nothing. 1930s JP Morgan led huge bailouts, equity owners got next to nothing. Why is this time any different? The market is acting like it is and you shouldn't ignore that information feed. I am just not totally following why.

2) If this is resolved with a bailout we may have reached a bottom in financials. Not screaming from the mountain tops but it is possible. You still have problems with housing, increasing credit card defaults, commericial real estate turning sour, and auto loan problems but what could take the whole finacial system down (the derivative issue) would have a major repair job done.

One more bonus thought just for you.
3) It seems like we went through this about 5 months ago. Remember the SIV bailout with the super SIV fund that went the way of the dodo bird? Well this has all kinds of problems with it. All we know is that they met and options were discussed. I don't know how bad it really is but it could be bad enough that unlike in 1998 this will truly be a governement bailout with still large losses for various financials.

Maybe the Business Model is Dead?

I see similar things happening with rating agencies (though I think they will always be around, maybe just in a different form). When the trust breaks down, why do it?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSt9mAsai4Mw&refer=home

State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.

Wisconsin sold $154.6 million of general obligation bonds last month at interest rates usually available only to borrowers with the highest credit ratings. Wall Street firms didn't require the state to insure the bonds, even though Wisconsin is graded four levels below AAA, amid signs that bond guarantors may lose their own top rankings.

This seems ridiculously low with inflation risk coming but I am not a muni expert.

When Wisconsin sold $154.6 million of bonds for highways, public buildings and water improvements on Nov. 15, it paid a yield of 3.87 percent for debt due in 2016.