Tuesday, May 6, 2008

MBIA (negative) earnings preview

Voltron says: MBIA may be taking a large loss due to an accounting rule change when it reports earnings on May 12th.

Exerpt from letter to shareholders:

One of the major reasons we chose to delay our conference call until after the 10Q is filed arises from our adoption of FAS 157 and the extensive work required to estimate the “fair value” of our credit derivative contingent liabilities. As difficult as the task is to estimate our level of expected credit impairments in this current environment, this valuation task is clearly one that stretches the ability of mere mortals. Given the fact that there is no market for any of these contingent liabilities, and no actual trades have ever been observed, our task is to establish a theoretical “fair value” for these instruments and then explain to you how we performed that calculation. I can tell you with great certainty that no two people could ever agree on this calculation so don’t be surprised when external sources propose wildly different possibilities for MBIA.

We will provide you with the different market inputs (related spread widening, credit migration, FAS 157 offset for MBIA, et al) so you can see what drives the number. Despite the fact that current GAAP accounting requires this calculation, I continue to believe that investors in MBIA should understand that this number is nothing more than a barometer of credit market sentiment and market liquidity or illiquidity and does not accurately reflect the actual losses that would be expected at MBIA. I would suggest you re-read our MTM Primer and my two prior shareholder letters on the subject (March 3 and March 9, 2008) in advance of next week’s results.

That said, due to significant spread widening, my guess is that this number will again be incorrectly described by the media as either new subprime losses or asset write-offs and will dominate the news coverage of MBIA.

No comments: