Friday, February 1, 2008

Long conference call never a good sign.

Financial Services
MBIA Soothes Street In Marathon Call
By Mark DeCambre

MBIA (MBI) managed to allay concerns about the strength of its balance sheet in a lengthy conference call Thursday to discuss its shaky year-end results, but repairing its reputation may be an even tougher call. The Armonk, N.Y.-based bond insurer has been under intense pressure from rating agencies of late and has been the subject of a withering campaign by hedge fund manager Bill Ackman at Pershing Square Capital. The beleaguered financial guarantor rattled the markets by posting a net fourth-quarter loss of $2.3 billion, or $18.61 a share, compared with a net income of $181 million, or $1.32 a share during the same period last year. Shares initially responded by dropping sharply. But during a four-hour earnings call that stretched late into Thursday afternoon, CEO Gary Dunton and the rest of MBIA's management team attempted to lay bare the inner workings of an insurance firm -- whose business of insuring debt in municipal bonds and more hard-to-parse collateralized debt obligations has been oft viewed as esoteric and opaque -- appeared to reverse investor sentiment. Shares rebounded to close up 11% to $15.50. MBIA execs gamely culled through a list of more than 200 investor questions as it tried to reassure investors and analysts of its solvency and the sufficiency of capital it has raised to head off predicted losses in the debt it insures and appease finicky rating agencies. The company, which has received a cash infusion by private equity firm Warburg Pincus, underscored that it has sufficient funds to meet or exceed rating agency's capital concerns and voiced its belief that it is well positioned to go forward. "It is virtually impossible to imagine a circumstance in which MBIA would become insolvent," said CFO Charles Chaplin, answering one of a litany of questions submitted by Ackman just prior to the start of MBIA's marathon call. The guarantor made a point of answering all of Ackman's questions. The activist investor has very publicly questioned the legitimacy of the firm's accounting of its losses and in some cases its operations. Ackman has a significant short position in MBIA and its rival Ambac Financial (ABK) that could result in a billion-dollar bonanza for the manager should they fail. He has railed against MBIA for more than a decade. Dunton called many of those assailing his firm "fear mongers." "It is very difficult seeing the reputation of the company you love come under fire," Dunton commented. "We are scratching our heads because we have over $16 billion of claims-paying resources." What was not clear on the call, however, was what the future of the franchise might look like going forward as competition increases and further downgrades loom. Dunton quipped that there is a new tier system for monoline firms, which are in jeopardy of losing their high ratings, which they use to enhance the credit quality of municipal bonds and funky CDO paper. There are those that are in the "main house," the "doghouse" and "the outhouse," Dunton said referring to firms that have suffered reputational damage because they may lose their credit rating and those that have already seen their triple-A ratings notched down. "We believe that we are in the doghouse," Dunton said. "We're earning our way back." Getting back to the main house may be difficult if the rating agencies don't buy the financial guarantor's claims. Indeed, about an hour after the MBIA call wrapped up, Standard & Poor's placed MBIA on watch for a downgrade with negative implications and cut Financial Guaranty Insurance Co. to double-A from triple-A. Fitch Ratings made the identical move on FGIC Wednesday. Standard & Poor's did not, however, match Fitch's downgrade of Ambac from triple-A to double-A but has the firm on watch for a possible downgrade. Fitch has been viewed as aggressive in its ratings actions, but S&P and Moody's Investors Service, which has also threatened to downgrade MBIA, hold more weight since their ratings are typically the two that investors and buyers of rated securities abide by. Losing their triple-A ratings would mean Ambac and MBIA would be limited as to the sorts of business they can underwrite. But more to the point, a downgrade would limit the scope of their business, since the universe of deals for a double-A rated firm is smaller slice of the monoline insurance pie than that of a higher-rated firm. Adding to that dilemma is the likelihood that a host of firms including FGIC, Ambac and MBIA all could be jockeying for that much smaller slice. Competition from new entrants also will prove a problem. Billionaire investors Wilbur Ross and Warren Buffett are likely to serve as rivals to the insurers by creating new outlets to insure debt, as Federal Reserve cuts create an attractive environment to underwrite new business. Attracting new business is the challenge. Ross has toyed with the idea of investing in Ambac or buying the guarantor outright, according to media reports, but on Thursday he fell short of revealing his intentions, other than to predict that he expected a shakeout among the guarantors during a public event. The flap surrounding monolines has compelled New York Insurance Superintendent Eric Dinallo to try and orchestrate a bailout of the sector by encouraging investment banks to provide some support capital that could either bolster the insurers or be used to form a reinsurance pool to assume some of the liabilities on their books. An accord among some of the challenged banks, such as Merrill Lynch (MER) and Citigroup (C) might be difficult to achieve, especially since those banks have suffered their own massive writedowns on subprime-related bets.

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