Tuesday, February 26, 2008

MBIA wants a tax break.

Voltron says: cry me a river, MBIA

MBIA (MBI) is going on the attack. The bond insurer on Monday eliminated its quarterly dividend and sketched out a plan to split its lucrative municipal bond operations from its structured finance side, which handles the increasingly perilous business of insuring mortgage-related securities. The moves came just hours after rating agency S&P affirmed MBIA’s triple-A rating, lifting a bit of the sense of siege that has descended on MBIA in recent months. Shares of MBIA and rival Ambac (ABK) surged as much as 20 percent in trading Monday afternoon.

Good news from the bond insurers has been well received on Wall Street in recent days, which could point to another rise when trading opens Tuesday. On Friday, blue-chip stocks rallied on reports Ambac was close to wrapping up a deal to raise new equity. Monday brought another late-day marketwide rally after S&P announced its decision not to downgrade MBIA. Tuesday could well bring confirmation of a possible capital infusion that could clear the way for Ambac to pursue a split as well.

But under new chief Jay Brown, MBIA appears to be positioning itself for a bigger stage - the one in Washington, D.C. A message to shareholders published late Monday promised that the company will take a responsible position on executive pay, with Brown noting that he has been a buyer of the company’s stock, not a seller like so many U.S. execs. He also returned to a theme hinted at in last Thursday’s surprise announcement that MBIA was dropping out of a key financial-insurance trade group: Brown believes the off-shore insurance industry, based in Bermuda, isn’t paying its fair share, and he’s here to do something about it.

“In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with U.S. domiciled operations to operate without paying their fair share of U.S. taxes,” Brown wrote in his Monday evening letter to owners. “After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient!”

And paying more isn’t the only action MBIA is ready to take. Brown threatens that if lawmakers don’t act, he’ll move MBIA from Armonk, N.Y., to Bermuda, because it’s so important to him that MBIA keep its cost of capital down. “I still don’t look good in Bermuda shorts,” he writes, “but we will eventually have to move the company if the U.S. tax code is not modified.”

Brown certainly has chutzpah. Though the company has raised $2.6 billion in new capital and appears all but certain to keep its triple-A rating intact, at least for now, MBIA is still struggling to find its footing amid a financial storm. Indeed, the company warned in Monday’s letter that it expects to take another mark-to-market writedown of its insurance portfolio in the first quarter. Picking up where former CEO Gary Dunton left off, Brown also accused short-seller Bill Ackman of trying to “destroy our franchise and our industry.”

With those sorts of challenges looming, now seems like an odd time to be devoting scarce management time to changing the tax code, of all things. But as Brown says, “Yes, we’re following our own course, but this shouldn’t surprise anyone.” True enough. By now, no one can be surprised by anything coming out of MBIA.

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