MBIA Cannot Estimate January's Losses

MBIA, the "AAA" rated company that recently raised capital by selling notes at 14% to shore up its balance sheet, is now saying Subprime Losses Continue and that it cannot estimate January's losses. Let's take a look:

MBIA Inc. and Ambac Financial Group Inc., the bond insurers hobbled by $10 billion of writedowns on subprime debt last year, said losses continued into 2008.

MBIA and New York-based Ambac said they have written little new insurance since their ratings came under scrutiny.

[Please see Ambac Deal Hits Snag, MBIA writing "Very Little" New Business for more on this idea]

Ambac marked down the value of derivative contracts linked to subprime mortgages by $650 million in January, according to a regulatory filing on Feb. 29.

MBIA said it couldn't estimate January's losses.

Ambac reduced the value of CDO guarantees by more than $6 billion in 2007. The company said its loss "trend" will continue into February. Market prices indicate the value of CDOs "have continued to decline," Ambac said in the filing.

MBIA said in its Feb. 29 filing that losses on mortgage-backed securities will probably increase this year. The company recorded $3.7 billion in market-value losses on its guarantees of asset-backed debt last year, mostly from mortgage debt.

MBIA said has seen "deterioration" in prime or near-prime home-equity loan securities it backed and loss payments may erode a "significant portion" of reserves by year-end.

Credit-default swaps tied to MBIA's debt soared 168 basis points to 767 basis points on Feb. 29, according to London-based CMA Datavision, a sign of eroding investor confidence in the company's creditworthiness.

Buffett Withdraws Offer

Warren Buffett says U.S. is in recession, but stocks still are 'not cheap'

The billionaire investor Warren Buffett said Monday that the U.S. economy was in recession, and that stocks were "not cheap" despite recent declines.

Buffett also said he was no longer offering to guarantee $800 billion of municipal bonds backed by MBIA, Ambac Financial Group and FGIC, the three large bond insurers.

Speaking on CNBC television, Buffett said he thought the U.S. economy was in a recession even though gross domestic product had not yet fallen for two consecutive quarters, a gauge many economists use to identify when a recession begins.

"By any common-sense definition, we are in a recession," Buffett said. "Business is slowing down. We have retail stores in candy, home furnishings and jewelry. Across the board, I'm seeing a significant slowdown."

MBIA and Ambac are clearly hurting. Bailout proposal after bailout proposal have died on the vine. Who wants to throw money down this sinkhole anyway?

Both are showing declines in business, both face competition from Buffett, and MBIA is admitting it has seen "deterioration" in prime or near-prime home-equity loan securities and loss payments may erode a "significant portion" of reserves by year-end.

MBIA Pretends It Can Raise Capital Even As California Opts Out

Bloomberg is reporting MBIA's Brown Says Plan Will Let Insurer Raise Capital.

MBIA Inc., the world's largest bond insurer, will restructure in a way that allows it to raise capital at a lower cost.

A plan to split MBIA's structured-finance business from its municipal insurance operation in the next five years will make the Armonk, New York-based company more transparent, Chief Executive Officer Jay Brown said in an interview today on Bloomberg Television.

"The way we were structured made it very hard for capital markets to put an attractive price for us to raise capital,'' Brown said. "How do we design the company to be able to raise capital at a reasonably attractive rate, right in the middle of a crisis like we're seeing today?''

My Comment: A company is the sum of all its parts and until something is done with those CDOs, all anyone is doing is pretending. Splitting a company in two pieces accomplishes nothing unless one can figure out how to make the losses in half the company vanish.

MBIA reported $3.4 billion in writedowns last year from guarantees on CDOs, which package pools of debt and slice them into pieces with varying ratings.

The company said it expects to pay claims of more than $700 million this year on bonds it guaranteed backed by home-equity loans.

My comment: How can MBIA estimate claims for the year when it can't even state what the losses for January are?

After a split, investors will be able to distinguish between problems in one part of the business and other healthier lines, Brown said. A split also could prevent the type of turmoil now occurring in the municipal bond market, Brown said.

"Turmoil in the municipal market is being driven by what has happened in the U.S. real-estate market,'' said Brown. "Those two things really have gotten mixed up.''

My Comment: What's mixed up is the business model of Ambac and MBIA, their assurances, and the idea that one can split a business in two and ignore one side of it.

Brown said he expects demand for municipal bond insurance to return even as some officials, including California's debt manager Paul Rosenstiel, have publicly questioned the value of guarantees on municipal bonds.

"At this particular moment, they have made a choice they do not need insurance,'' said Brown, referring to comments by California officials. "I am pretty certain that will not be the case for the long term.''

My Comment: If California returns to bond insurance, it will not be with either Ambac or MBIA. Instead it will be with Buffett.

Because MBIA books revenue from insurance contracts over time, Brown said, it has the "luxury'' of forgoing new business while maintaining about 90 percent of revenue this year.

My Comment: Exactly where is the "luxury" of forgoing business when you are running out of reserves? Look at the company's own words: MBIA said has seen "deterioration" in prime or near-prime home-equity loan securities it backed and loss payments may erode a "significant portion" of reserves by year-end.

It's time to end the pretending. I am again calling out the rating agencies for their role in this mess. Please consider S&P Sniffs Horse Hockey, Calls It A Rose as well as MBIA Maintains Highest Rating, Pfizer Cut.

Splitting a rotten apple in two does not give you half a good apple.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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