MBIA's New Structure

It's taken rather longer than anybody expected, but MBIA (MBI) has finally put in place its long-promised plan to split up the company into its component parts, with the relatively strong public finance insurer getting a new name -- National Public Finance Guarantee Corporation -- and being insulated from any of the structured-finance liabilities which have devastated the company's credit rating and share price.

I spoke to Jay Brown, MBIA's CEO, this morning, and asked him a few of the obvious questions.

The first one was whether this corporate restructuring is going to do any good: will National actually write any business in practice?

Brown said that realistically not much is going to happen in terms of writing new business until MBIA files standalone financial statements at the end of the first quarter: "that will provide a lot of clarity", he said. He did add, however, that if you're holding municipal bonds which were wrapped by MBIA in the past, the new structure should be a relief to you pretty much immediately, since MBIA is making every effort to make National as bankruptcy-remote as possible.

From the point of view of the holding company, less has changed: it still owns the same mix of businesses it had before. But now they're more clearly delineated, which means they're easier to deal with separately, which might help increase value; MBIA's shares are up 17% in early trade, but still near their all-time lows below $5.

As for the people who hold structured products guaranteed by MBIA, they're not substantially worse off than they were before, just because they've already marked down their MBIA wraps to almost worthless.

Going forwards, of course, the big task facing Brown is to persuade the markets that National's guarantee is really worth something. To that end, he's taking a page out of Barack Obama's book:

It's an uncertain world out there. We're going to be pushing a very transparent company. Starting today we're putting up on our website every policy the company insures, with transparent financials.

But do investors really have the time or the inclination to go through all that information and judge for themselves how creditworthy National is? Isn't the whole point of a bond insurer that investors are lazy and don't want to do that kind of work and are much happier just relying on a triple-A rating? And isn't that now a thing of the past, never to be repeated?

On the other hand, municipalities, especially small ones, and especially the ones with a lot of auction-rate securities still outstanding, are desperate to refinance their debt and are finding the markets essentially closed right now. If National can help them at all, it might be able to make the difference between getting a bond away and not being able to issue anything.

Brown knows it's going to be slow going: "We started 35 years ago," he says, "and took the better part of a year to sell the first policy." But at least now there isn't any uncertainty about MBIA's structure going forwards.

And he also cleared up a bit of confusion I had about the regulatory status of National: although right now it's an Illinois company -- it's being created out of an insurer MBIA bought in 1989 -- the regulators in both Illinois and New York have agreed that MBIA can move it to New York. So New York State will still be MBIA's regulator, not Illinois: there's no forum-shopping or regulatory arbitrage going on here.

There's still going to be lazy investors out there, people didn't do much work at all on anything. We're going to have to see how this market develops over the next few years. There were $400B in bonds issued last year.

I'm still far from convinced that the bond-insurer business model really works any more, or, for that matter, any business model which was or is reliant on a triple-A credit rating. And National might be asked to start paying out on its insurance policies pretty soon, if municipal finances continue to deteriorate. But if it can do that happily and still retain its financial strength, there might conceivably be a future for it yet.

Comments

[Stone Fox Capital]

good bank/bad bank concept at work. Finally! We'll have to see how it works but this sure give people more confidence to use them going forward.

2009 Feb 18 11:27 AM

[Boon]

It all depends on the kind of ratings the credit agencies give to this "new MBIA". Anything short of a AA rating will mean that it will not be economical for the company to guarantee Muni bonds.

Another point to consider is the trust in rating agencies. They've failed us once, why should we trust them to be able to effectively evaluate companies, especially monolines? I think investors need to make up their own minds about the strength of a monoline rather than depend solely on the rating agencies.

Also, another flaw is that the bond being "wrapped" will adopt the rating of the monoline (if its higher than the underlying bond). However, what if we have a BBB bond wrapped by 3 monolines, all at AA? Current rating methodology dictates that it will only get an AA rating, but surely having 3 AA monolines guaranteeing it makes it pretty secure? A triple wrap means that the project has to fail AND all THREE monolines have to fail at the same time at the time of default in order for the bondholder not to get his money back.

2009 Feb 18 11:43 AM

[Larrysyr]

I'm not sure that either the rating agencies or the bond insurance companies should be in business at this point. Both have proven to be failures, and I don't see how this change will correct the mistakes management is prone to.

Investors and muni issuers need each other, without question. But the model is broken. The reason bond insurance looks appealing is that it theoretically protects muni investors. This protection is reflected in increased ratings from Moodys, S&P, and FItch. But how much protection are the investors really getting?

I think municipalities should issue debt without ratings, and investors should price it according to their own due diligence. Investors should be free to hedge against losses with whatever means they can devise. Let the market sort out the credit-worthy issuers and price the risk appropriately.

2009 Feb 18 12:08 PM

[Stone Fox Capital]

agree... never really understood all these insurance crap. Same goes for credit dfault swaps... Isn't the point of diversification that you protect yourself from fraud and loss? Adding all this insurance just makes it more costly and less profitable w/o really knowing that the insurance is going to cover you. Regardless, for most people the good bank/bad bank scenario will make it more likely to be used.

2009 Feb 18 01:39 PM

[PeteK]

So, who's rating the Rating Agency ?
Seems so much bias with that Agency.

2009 Feb 19 06:37 AM

[pcyhuang]

The model of the pure public-finance insurere would work if the federal government puts a stop-loss on any policy written, after an initial deductible loss taken by the insurer. The would help to restore the AAA rating, clients' confidence, and the securitization market.

2009 Feb 19 08:46 AM

[Larrysyr]

I don't have a problem with the feds guaranteeing municipal debt, but, then why would you bother with the private insurer at all?


On Feb 19 08:46 AM pcyhuang wrote:

> The model of the pure public-finance insurere would work if the federal
> government puts a stop-loss on any policy written, after an initial
> deductible loss taken by the insurer. The would help to restore the
> AAA rating, clients' confidence, and the securitization market.

2009 Feb 19 03:09 PM

[Still Not Fooled]

Amazed at the subdued reaction to this. . . what is being orchestrated here, with the assistance of politically motivated regulators, is an asset stripping of MBIA Insurance Corp, to the detriment of all its remaining creditors, with the assets being used to support "National", which will solely help the municipal policyholders. Over $2 billion of capital is being upstreamed to the HoldCo and downstreamed to the NewCo. If the management team of some other entity that was as clearly insolvent as MBIA tried this they would be charged with fraud. I know some may think this is good for the muni holders but think of the precedent this sets: if "National's" municipal revenue bond book gets in trouble, do they look to hive it off?

"As for the people who hold structured products guaranteed by MBIA, they're not substantially worse off than they were before, just because they've already marked down their MBIA wraps to almost worthless."

Are you out of your mind? Who told you that, Dinallo or Jay Brown? (BTW - why would you even bother speaking to Jay Brown...he's clueless). Look at what the rating agencies had to say about the "fairness" of this. And look at the price action in HoldCo vs. OpCo CDS...OpCo holders are completely screwed by this. If the lawsuits don't start flying within days I will be shocked.

2009 Feb 19 09:51 PM