Tuesday, December 11, 2007

MBIA reflects perfection.

MBIA's stock price is assuming a successful government bailout and no ratings downgrade.

MBIA's (MBI) share price had a healthy 13% bounce after news that private equity firm Warburg Pincus will purchase up to a $1 billion stake, buying $500 million of common stock at $31 initially and receiving warrants to purchase up to $500 million more at $40 next quarter. This news cheered investors, indicating that MBIA may not suffer a downgrade in the next few weeks, which Moody's had earlier described as "somewhat likely."

The announcement overshadowed MBIA's statement that writedowns of the value of the debt it guarantees will exceed $342 million in the 3rd quarter and that it will have to set aside $500-$800 million in the fourth quarter to cover losses in its residential mortgage-backed securities portfolio.

If this proves to be a low estimate, the new capital may not cover losses. According to a Bloomberg report, Egan-Jones Ratings Company estimates that MBIA needs to raise at least $4 billion in new capital, if not more.

Of course, this timely infusion of capital is certainly not bad news. It could be the first faint light at the end of the tunnel for MBIA, or it could be an oncoming train...

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