Friday, December 14, 2007

MBIA Could Be a Zero Faster Than Expected

By Whitney Tilson

Wow, some big developments that make me think MBIA (MBI) could be a zero even faster than I thought.

First came this news Wednesday:

Fitch Ratings placed Security Capital Assurance Ltd., a Bermuda-domiciled financial guarantor, on watch for possible downgrade, kicking off what could be a flurry of ratings actions on bond insurers.

SCA insured more than $16 billion of collateralized debt obligations — pools of debt backed by assets such as mortgages and loans, making it a small player in the business compared with rivals Ambac Financial and MBIA. It fell more than $2 billion short of the capital it needs to maintain its coveted triple-A rating, Fitch said.

In coming days, the rating companies will issue ultimatums to SCA’s bigger rivals, specifying how much capital these firms need to raise to preserve their ratings. It’ll be an important development in the credit crisis.

SCA is only the fifth largest bond insurer — if it needs to raise $2 billion, how much more will the largest players, MBIA and Ambac, have to raise?! My guess: $4-6 billion each. No way can they raise that much money in this environment. Their entire market caps are $3.8 and $2.5 billion, respectively (and falling fast).

And then MBIA announced Thursday morning that they’re canceling Friday's conference call, which they announced on Monday as part of the Warburg deal:

MBIA Investor Conference Call Will Not Be Held on Friday, December 14, Due to Pending Rating Agency Reviews

ARMONK, N.Y.–(BUSINESS WIRE)–Dec. 13, 2007–MBIA Inc. (NYSE: MBI), the holding company for MBIA Insurance Corporation, today said that in light of the fact that reviews by all three rating agencies are not expected to be completed by Friday, December 14, 2007, the Company has decided not to schedule a conference call on that day.

Note also that MBIA hasn’t released the 8-K related to the Warburg deal, which would reveal the details. I can only conclude that the Warburg deal is contingent on MBIA getting its AAA rating reaffirmed — but of course MBIA didn’t include this critical piece of information in its announcement.

If I’m correct, now Warburg’s investment makes a bit more sense (I was wondering because they’re known as being smart; I still think they made a huge mistake here, but at least it’s somewhat more understandable): they bought a call option on MBIA surviving for a few more months by making their initial $500 million (not $1 billion) investment contingent upon the ratings’ agencies reaffirming the AAA rating, which would at least buy MBIA more time, and pushing off the second $500 million commitment (to backstop a rights offering) into the first quarter of 2008, which I’m sure is also loaded with contingency clauses.

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