Tuesday, February 26, 2008

MBIA, S&P and What AAA Really Means


From Seeking Alpha: 

Observation: MBIA (MBI)
is forced to borrow at deep junk rates (14%) in a 7% environment
(surplus notes have a slight premium). These notes then go on to trade
at an immediate discount, yielding 20%.

Observation: MBIA had to reduce, then cut its
dividend to preserve capital (they didn't even have a chance to pay out
the reduced dividend).

Observation: MBIA has diluted there current
shareholders by considerably over 50%, raising discounted equity
capital in amounts that approach what was thier extant market
capitalization. This was on top of the record cost of the debt
offering, at least for a "AAA" company!

Obervation: MBIA has lost more then 80% of its equity value in less than a year.

Observation: MBIA has recorded two historic and unprecedented losses, back to back, and foresee several more to come.

Observation: MBIA has written down to zero the interests in its captive reinsurer.

Observation: MBIA's captive reinsurer lost its AAA rating, cut to A-, thus forcing it swallow those risks.

Observation: MBIA as insured securities and
structures with minimal loss history and nearly no legal precedent in
how to handle conflicts during losses and liquidations, on an
underlying of that is going through the biggest correction/bust in the
history of this country's financial system.

Observation: MBIA now has competition from a
better capitalized, cleaner, and arguably better managed competitor
that is eating into its business at a rate as fast as 60 clients per

Observation: MBIA reinsures, and is reinsured
by very small circle of entities whom concentrate very highly
correlated risks using more than 80x leverage.

Observation: MBIA's insurance of leveraged loans and junk bond CDOs has not surfaced yet, but I'm pretty sure its there.

Final Observation and Conclusion:
S&P has just affirmed the highest credit rating available to this
company. This is a damn shame! This does not confirm the
creditworthiness of MBIA, it devalues the meaning and worth of the AAA
moniker. Shame on you S&P.


Burner said...

What's up with MCO going up?? There is still no good news out there

Gerard said...

The mco trade is going to require patience. I still think they will ultimately do back your year 2001 prices (about $12) but it could take years.