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MBIA Inc. (NYSE:MBI)

Q3 2009 Earnings Call

November 10, 2009 8:00 am ET

Executives

Greg Diamond – Director IR

Edward Chaplin – President, CFO & CAO

Analysts

Andrew Wessel - JPMorgan

Darin Arita - Deutsche Bank

Arun Kumar – JPMorgan

Donna Halverstadt – Goldman Sachs

Terry Shue – Pioneer Investments

Operator

Good morning and welcome to the MBIA Inc. third quarter 2009 financial results conference call. (Operator Instructions) I would now like to turn the call over to Greg Diamond, Director of Investor Relations at MBIA; please go ahead.

Greg Diamond

Welcome to MBIA’s conference call for our third quarter 2009 financial results. We're going to follow the same format as last quarter's call. Chuck Chaplin will provide some brief comments and then we will start the question-and-answer session. We have posted several items on our web site including the Form 10-Q for the quarter.

We've also posted a revised version of the quarterly operating supplements third quarter as we made some corrections from the one that was originally posted last night. The information for accessing the recorded replay of today's call is in our financial results press release, which is also available on the web site.

Our company's definitive disclosures are incorporated in our SEC filings. The purpose of our call today is to discuss some of the points raised in our most recent 10-Q to facilitate a greater understanding for investors. The 10-Q also contains information that will not be addressed on today's call.

Please note that anything we say on this call is qualified by the information provided in the 10-Q in our other SEC filings. You should read our Form 10-Q as it contains our most comprehensive disclosures as of the end of the third quarter about the company and our financial and operating performance as well as subsequent developments.

Today’s Q&A session will be handled by Chuck Chaplin, President, CFO and Chief Administrative Officer of MBIA.

Here is our Safe Harbor disclosure statement, our remarks on this conference call may contain forward-looking statements. Important factors such as the general market conditions and the competitive environment, could cause actual results to differ materially from those projected in our forward-looking statements.

Risk factors are detailed in our 10-K, which is available on our web site. The company undertakes no obligation to revise or update any forward-looking statements to reflect changes in events or expectations. In addition, the definitions of the non-GAAP terms that are included in our remarks today may also be found on our web site.

Before we begin the Q&A session, Chuck Chaplin will provide a few introductory comments.

Edward Chaplin

Thanks Greg and good morning everyone. For MBIA Inc. this quarter is another one in which the continued weakness in the US housing market and the economy has negatively impacted our financial results. As a result of the additional loss activity we are disappointed with our operating results for the quarter.

While we still cannot predict the path of this recession we believe that the potential future volatility in our housing related exposures may be moderating. And our company’s are emerging with their balance sheets and their human resources sufficiently strong.

We don’t believe that the business model we’ll pursue in the future will be identical to that of the past but that the inventory of skills and our balance sheet capacity that we have can be used to build value propositions that will work in the market in the future.

We’re not out of the woods at this point, but at least we have a better appreciation of the total area of the woods that we’re in. Although we manage our two insurance businesses, our asset management advisory business, and our wind down ALM businesses separately, I’ll discuss our results at the consolidated level and I’ll make some comments about the business contributions.

In addition our press release focuses on year to date results which we think is the appropriate way to think about a business like ours. But I’ll focus my comments here on the third quarter to provide that detailed context on the most recent period.

As you know we keep score of operating performance and value creation over time with a statistic called adjusted book value. Fundamentally adjusted book value or ABV is a measure of the present value of the tangible worth of the company. Its defined in our supplement at page 57 and its displayed by business on page nine of the supplement.

In the third quarter and in the year to date period our consolidated ABV declined from $40.00 per share to $39.00 per share. The primary drivers of this decline in the third quarter were loss reserves and impairments in our insurance portfolios and realized losses and invested assets partially offset by all other sources of income and gains on debt buybacks.

I’ll make some comments on each of these drivers, first loss reserves and impairments of insured credit derivatives. The biggest sources of volatility have been in MBIA Corp second lien RMBS. To date we’ve incurred [inaudible] of loss in this portfolio. We’ve made $3.3 billion in payments, we’ve recorded $2.1 billion in total recoveries and have a remaining reserve of $1 billion.

In the third quarter we say initial delinquencies decline less then our expectations and in a minority of deals initial delinquencies actually rose. You can see this effect in the supplement on page 47, the average pace of declines was greater from February to June than it was in the third quarter although the overall decline does continue.

As a result we increased our expectation for future net loss payments, by approximately $184 million. We also increased our estimate of recoveries from seller/servicers based on our contractual rights to have ineligible loans repurchased or replaced by about $76 million.

In addition to our loan put backs and litigation recovery efforts we’ve also aggressively pursued transfers of servicing for underperforming deals as historically we’ve seen material improvement in credit performance when collateral is placed in capable hands.

To date we have transferred servicing on 10 second lien transactions comprising approximately $3.7 billion of collateral to new servicers that we believe to be highly capable to handle the high [cutch] point servicing required for second liens.

We believe that overall performance should improve as these deals are fully integrated into these new servicing platforms. Moving beyond the second liens we also added $83 million in loss reserves for one Alt-A first lien RMBS transaction in the quarter. Unlike our other Alt-A exposures this deal comprises primarily adjustable rate collateral which is expected to significantly underperform the fixed rate Alt-A portfolio.

The total Alt-A portfolio that we have originated in 2006 and 2007 is approximately $2 billion and this deal represents about a quarter of the portfolio. All told, our increase to loss expectations for RMBS, that’s the second lien and the Alt-A was $191 million in the third quarter pre-tax and the total insurance incurred loss in MBIA Corp was $210 million.

Although not recognized for GAAP our ABV statistics also considers credit impairments on our insured CDOs. From 2007 to September 30, we’ve incurred a total of about $2.4 billion of losses including $594 million paid to fully or partially settle these credits leaving a net credit impairment outstanding of $1.8 billion.

We increased the amount of the impairment by $250 million in the third quarter. The increase is due to projected further deterioration of subprime RMBS collateral in these deals. The expected severity of loss in the subprime market continues to rise.

There has been some favorable news on the housing front lately with house prices starting to firm. On the other hand higher unemployment may be negative for our second liens. So while potential volatility may be about the same as last quarter, the fact that we have less par outstanding as a result of terminations on our CDOs then payments on the RMBS suggests at least we’re making some progress at working through these issues.

So that’s the story on our housing related exposures, another area of focus is commercial real estate. We have $35 billion of exposure to CMBS pools and $10 billion of exposure to CDOs of commercial real estate collateral.

In the CMBS pools, CMBS securities that have subordination built into them are referenced in a synthetic structure that we wrap with a second layer of deductible that enhances our position. Losses on individual mortgages in the CMBS are crystallized when the properties are foreclosed and liquidated.

As these losses accumulate and when they cause losses to the CMBS tranches our deals reference the deductible in our deal would be eroded. To date foreclosure activity has been trivial. While delinquencies continue to rise and frankly we project that trend to continue for some quarters, none of our transactions are considered impaired based on our current forecast. So the total impact to ABV of MBIA Insurance Corp’s loss reserves and credit impairments was approximately $460 million on a pre-tax basis in the third quarter.

Turning now to the investment side, realized losses and permanent impairments on balance sheet assets were $171 million, $91 million of these losses are associated with write-downs of assets we acquired in relation to two remediation efforts.

In both cases these structures are now consolidated on our GAAP balance sheet as variable interest entities, or VIEs, and in both cases the recognized losses would have been greater had we not engaged in the remediations.

For geography, $50 million of the $91 is included in other them temporary impairments on the income statement and $41 million is in the realized losses line. Beyond these we have $43 million of other then temporary impairments on assets in the ALM business, primarily on assets that are subprime RMBS related.

We also had $35 million of realized losses on nearly $400 million of asset sales in the ALM portfolio. Net losses on FX, derivatives, and hedging arrangements excluding now the mark-to-market on insured credit derivatives, were $87 million pre-tax.

The largest drivers were a $69 million loss in the ALM portfolio driven by an increase in value of our euro denominated liabilities and $45 million of the increased value in warrants issued during our capital raise last year, that mark would appear in the corporate segment.

Offsetting these losses were solid pre-tax income from National Public Finance Guaranty Corporation, our US municipal bond insurance subsidiary. National had $132 million of pre-tax income in the quarter which is pretty close to our expected run rate.

It did have one significant addition to its loss reserves, $27 million for a student loan credit. The remaining components of pre-tax income were $86 million from the ALM portfolio which is driven by debt buybacks and $38 million from MBIA Insurance Corp.

In the ALM portfolio we repurchased $193 million par amount of MTN for approximately $83 million so the gain was $110 million. Now I’d like to turn and make some comments about our balance sheet position.

We’ll start with MBIA Insurance Corp, it would be most helpful to depart now from GAAP and discuss the statutory balance sheet which is summarized in our supplement on page 38. You should also know that our full statutory statements will be filed today.

The first thing to note is that on the asset side, 37% of the assets are in the form of a loan to the ALM portfolio at the holding company. The loan does not have an amortization requirement but the ALM portfolio is taking advantage of improved asset liquidity to begin retiring the debt.

Since September 30, $100 million has been paid down. The second thing you should know is that $1.5 billion of the $3.2 billion in invested assets on the balance sheet is in cash and short-term investments. In our press release we had a $1.9 billion figure, it differs primarily because it includes the liquid assets of MBIA Insurance Corp’s subsidiary, our liquidity planning is based on this narrower definition.

We are keeping the portfolio highly liquid with the intent to ensure that all the near-term payments that we expect on our RMBS and CDO [squared] exposures are covered and covered with a cushion. The second lien RMBS payments are expected to decline substantially and they’re the primary driver behind the illustration that we show on page 50 of this quarter’s operating supplement.

We have always expected that 2009 would be the peak period of payments on the second lien RMBS and we expect 2010 will be much less significant. On the liability side, the first thing to look at is contingent liabilities which are obviously not on the balance sheet itself, MBIA Corp’s portfolio of insured risk was $232 billion at December 31, 2008 and is $215 billion now and the decline is mostly due to the CDO and RMBS areas.

In the third quarter we had four transactions to terminate in accordance with their terms which reduces $2.1 billion of exposure. We also agreed in the quarter to reassume $3.5 billion of structured finance exposure from our reinsurers. Now since the end of the quarter we have agreed to two commutations with two counter parties, which eliminate another $2.1 billion of exposure.

Those exposures had potential liability. Now onto the balance sheet liabilities, the first thing to note is the loss in LAE reserves, the net balance sheet account is $546 million. Inside of this account among other things, are three components that are related to our second lien RMBS deals.

One, expected payments as mortgages are charged off which is about $1.8 billion. Two, excess interest in the securitizations that we expect to recover over time of $1.5 billion, and three, recoveries due to our put back rights which are about $1.1 billion.

These latter two effects, recoveries from excess interest and recoveries from our contractual rights against the seller/servicers are an offset to statutory reserves. So, doing the arithmetic, we are at the point now where the expect future recoveries are larger then the amounts that we believe we have left to pay out.

To that extent, if either losses paid or recoveries vary from our assumptions, our ultimate loss would change accordingly.

The bottom line of this is that MBIA Corp has a statutory capital base of $3.9 billion, $2.5 billion surplus, plus $1.4 billion of contingency reserves. Its invested assets were $5.2 billion on September 30, and claims paying resources were $7.1 billion versus its statutory loss reserves of $546 million.

For the ALM portfolio it held $7.4 billion of book value assets at September 30 and $8.4 billion of book value liabilities of which $2 billion is the secured loan from MBIA Insurance Corp. In addition its liabilities include $600 million owed to the corporate segment, so liabilities owed to third parties total $5.8 billion.

We expect that this book value deficit between the $7.4 book value assets and $8.4 book value liabilities will be closed over time by repurchasing the debt of the portfolio at discount and by investing the asset portfolio more aggressively.

We are actively pursuing the former and we are cautiously considering the latter. The portfolio is expected to have positive operating cash flow for the next several quarters and has seen over $700 million in market value improvement in its assets in the third quarter.

As of September 30, it held $1.3 billion in cash and short-term investments, about $600 million of which is free cash. All of its puttable [inaudible]] are currently collateralized with cash or a high-grade liquid securities.

So we believe the liquidity risk there is reasonably manageable. At the holding company activities level, we held $409 million of cash and short-term investments at September 30. Its debt service and operating expenses are running about $30 million a quarter and it has debt maturities in 2010 and 2011 that sum to $160 million.

Its current resources and cash flow are enough to maintain its operations into about 2013. Finally in our National Public Finance subsidiary we held $630 million in cash and short-term investments at September 30. We are taking steps to invest somewhat more aggressively in this portfolio while still holding at least a $300 million liquidity cushion.

National’s capital position improves every quarter due to its strong earnings from operations and its declining portfolio. National started out life with capitalization at slightly less then the S&P AA level but it is trending higher and it is solidly within the AA range today.

So those are the key facts to understanding how we lost $1.00 per share of value in the third quarter and the balance sheet position that gives us confidence that we will be around to grow our business in the future.

Before moving on to your questions, just one more comment on the subject of quarterly conference calls, with this call we’ve now returned to a more traditional format and more traditional resources with Greg and I taking the call. However we’ll continue to evaluate the effectiveness and the productivity. If you have an opinion about whether or not we should continue to hold quarterly calls, please let us know.

Greg and his IR team have been extremely responsive to our investors as well as to our management team and others and has agreed to participate in calls and meetings along with management with shareholders that have questions and so to the extent that you have questions about the things that are going on in the company, please let IR know and we’ll handle them accordingly regardless of where we go with quarterly conference calls.

And with that we’d like to open the floor to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andrew Wessel - JPMorgan

Andrew Wessel - JPMorgan

Just two, I guess one, for the $7.4 billion of book value investments in the ALM business, what was the market value of that $7.4 billion.

Edward Chaplin

About $5.9 billion. The OCI component in the ALM portfolio declined from June to September by about $700 million.

Andrew Wessel - JPMorgan

And the other question I had was on the deferred tax asset, the $1.3 billion deferred tax asset, on the statutory basis do you expect to be profitable in 2009.

Edward Chaplin

I don’t want to go into forward-looking statements about the fourth quarter at this point.

Andrew Wessel - JPMorgan

Okay that’s fair, were you profitable through the first three quarters.

Edward Chaplin

Through the three quarters on a taxable income basis, we do have a small NOL.

Andrew Wessel - JPMorgan

And then so that would, there’s a chance that I guess that’s get onto another question, but anyway using that deferred tax asset is there kind of an outlook for profitability that makes that $1.3 billion recognizable here or how do you justify carrying it.

Edward Chaplin

Yes, the answer is yes that we anticipate having adequate taxable income to absorb it in the future. A big part of the deferred tax asset is related to unrealized losses and we expect those unrealized losses to reverse so they are sort of self-funding if you will.

Operator

Your next question comes from the line of Darin Arita - Deutsche Bank

Darin Arita - Deutsche Bank

Just a couple of questions here, first with respect to National there’s some confidence expressed in the press release on the creation of that entity, can you give us an update on what is happening there and give us a sense of timing on when that might be resolved.

Edward Chaplin

National was created on February 17, 2009 so of course it does exist today. There have been a series of litigations filed that challenge the decision of the Insurance Superintendent to permit the creation of National. They’re ongoing. There’s extensive disclosure about the progress of the litigations in the 10-Q but just in terms of timing, obviously its litigation, its hard to be very firm about timing.

We would anticipate that our Article 78 actions will be completed some time in 2010. As it gets resolved we’ll have to see what impact that has on other litigations.

Darin Arita - Deutsche Bank

And in terms of the loss for remediation efforts, can you talk about what further analysis MBIA has been able to do in the third quarter.

Edward Chaplin

When you say loss for remediation analysis, are you referring to the process of reviewing files on second lien RMBS that are subject to put back replacement rights.

Darin Arita - Deutsche Bank

That’s correct.

Edward Chaplin

Okay, in the third quarter we did review additional files, I think we went from about just under 24,000 reviewed to about 27,000 reviewed. And the increase is the reason for the $76 million increase to the recoverable that we recorded in the quarter.

Operator

Your next question comes from the line of Arun Kumar – JPMorgan

Arun Kumar – JPMorgan

A couple of questions for you, one is in terms of your cash burn rate, if you look at what you paid out in the quarter, its about $600 odd million, offset by certain incoming cash sources and if I look at your projections that you have on one of your slides, I think its slide 50 that shows your payout expected over the next several years, you actually expect to pay almost nothing out in 2013, 2014, 2015. One is could you comment on that and secondly if someone were to just extrapolate the quarterly payments that you made in Q3 and do that as a comparison to your cash and investments at the MBIA Insurance Company, like you said correctly about $3 odd billion of cash and investment and you’re paying out this quarter, it leaves probably a net amount of $400 or so, can one make any kind of conclusion as to how long the insurance company will be able to continue to make payments on its own without other sources of funds or would that be totally a question that’s erroneous.

Operator

Hold one moment.

Arun Kumar – JPMorgan

I just asked a question, I’ll repeat the question, the question was related to the cash bond rate for MBIA Insurance Corp going forward given that you paid out a net amount of $400 odd million in Q3 and given you have about $3.2 billion of cash and invested asset at the hold co, how long do you think the insurance company has with its existing resources to continue to make payments. Now I preface that question with page 50 of your supplement that shows that you actually expect to make little or no payments in 2011, 2012, and 2013.

Operator

I apologize but there will be a slight delay in today’s conference, please hold and the conference will resume momentarily. Thank you for your patience. Mr. Kumar your line will remain open so please hold.

Edward Chaplin

Are we together.

Operator

You are.

Edward Chaplin

Hi and everyone else who has been hanging on for the answer to Arun’s questions.

Arun Kumar – JPMorgan

Do you want me to repeat the question or do you have it.

Edward Chaplin

No I have it, so thank you all for hanging on. Not clear on what we just experienced, so the issue is do we think that MBIA Insurance Corp has adequate resources to cover all of its liabilities and the answer to that is yes. That continues to be true for a couple of reasons. One is when you think about its resources, you do have to look at both its balance sheet assets today as well as the investment income and installment premiums that it receives over time. And then the other thing to consider is the payout expectations with respect to our liabilities. And that’s where perhaps the story is a little more interesting.

And it is illustrated as you suggested on page 50 of the supplement and what you see happening basically is the period of maximum peak payments on our insured second lien RMBS trailing off after year end 2009. We have expected all along based on the structure of those transactions that 2009 would be the period of peak payment and they do fall off thereafter.

The way they work is that as loans are charged off we make payments that go into the waterfall in the securitizations and pay off the principal of the transactions so as you pay down the principal with a given set of loans that are going to default and be charged off, as you pay them out you have more and more, a larger proportion of the remaining securitizations made up of loans that are current and performing on which you capture excess interest.

So the excess interest causes our offset, the cash outflows in our projections and as you can see on page 50 at some point they actually turn on average positive. That is to say most of the loans that are going to default and be charged off and the securitizations have been paid off, and you’re receiving the excess interest from all of the performing loans that remain in securitization for their terms.

Again we show that graphically and in my prepared remarks I did try to touch on that a bit and talk about the relative components of the reserve for second lien RMBS that includes payment that we expect to make in the future, which are about $1.8 billion, recoveries that we expect from excess interest which is about $1.5 billion, and then recoveries that we expect from the seller/servicers and we talked before, last quarter, about how we arrive at that number which currently is about $1.1 billion.

So the cash flows from the excess interest in the securitizations is actually coming in the door now, starting to come in the door now although obviously much of it is to be received in the future and we have said that the recovery on the, our put back rights would occur about three years out. So it is with the impact of those things taking place that you see the actual payments falling dramatically into 2010, they become if you will negative payments or net receipts in late 2011.

Arun Kumar – JPMorgan

Just a quick follow-up on the other point you made in your press release that you commuted transaction that had $1.2 billion in net power exposure for the payment of 93, and you said that the amount was less then the charge that you had taken, could you comment on what the charge was, the last reserve charge that you had booked set up for that particular item.

Edward Chaplin

No, we don’t typically disclose individual deal loss reserves or impairments.

Arun Kumar – JPMorgan

Then a follow-up to regulatory discussions, I wanted to ask you about the regulatory viewpoint in terms of the continuing of the payment on the surplus note that’s costing you about $140 billion every year. Obviously you’ve been current on that up to this point, but given actions with other companies in the recent past, could you comment on discussions you may or may not be having with the regulator in terms of payment of the surplus note coupon and the second thing is, one of your competitors, AmBank yesterday in its 10-Q made comments about regulators taking a look at their payments and their balance sheet and so on and so forth, could you comment on the status of discussions that you’re having with the regulators, if any, related to the financial health of MBIA.

Edward Chaplin

First of all we’re not having any discussions with any regulators or anyone else about MBIA Insurance Corp not paying its obligations as they come due and that is our expectation and that’s what’s built into all of the sort of forecast and analysis that we’re looking at and sharing with the regulators.

So that is not a part of any discussions that we’ve been having.

Arun Kumar – JPMorgan

And regarding the surplus notes, there is no discussion on that front as well.

Edward Chaplin

There’s been no discussion about the surplus note payments. The last payment was July 15, the next one is January 15, 2010.

Arun Kumar – JPMorgan

And in terms of dividends obviously capacity from the op co to the hold co, is there any. I know you have not taken much in terms of dividends from the op co to the hold co in the past, I would say year and a half, almost two years now. Is there any intention to take any money up to the hold co or are you going to leave it all at the op at this point.

Edward Chaplin

Yes, we did have one dividend obviously in February of 2009 in conjunction with the transformation. The regulator goes through a very rigorous analysis to determine that its reasonable and appropriate to pay that dividend. Having done that we don’t anticipate that we’ll pay any dividend from MBIA Insurance Corp up to the holding company in 2009 and I also don’t anticipate that we’ll pay any dividends from National up to the holding company in 2009.

As we go forward obviously we are expecting that our operating subsidiaries will be able to provide dividend flows to the holding company and that over time it will become clearer with respect to MBIA Insurance Corp what its capacity is to pay dividends.

Operator

Your next question comes from the line of Donna Halverstadt – Goldman Sachs

Donna Halverstadt – Goldman Sachs

Two quick questions for you, at one point you made the comment that expected recoveries exceed what we think we have left to pay out and I think that comment applied to your entire book of business, not just a certain subset of it, is that correct you were talking about your entire book of business.

Edward Chaplin

No, that comment, its really specific to our second lien RMBS. If you look at the overall statutory reserve its positive, or it’s a reserve of $546 million. So net across the whole MBIA Insurance Corp book of business we expect to pay out present value $546 million.

Donna Halverstadt – Goldman Sachs

The other thing I wanted to ask about on the topic of NOL carrybacks going from two years to five years do you expect a tax refund in 2010 and if so, what size.

Edward Chaplin

The new law permits NOL carrybacks from 2008 and 2009 back five years. We did not have an NOL in 2008. At this point we do through three quarters of 2009, we do have a small NOL but not sufficient to absorb the entire $500 million of taxes paid in the five-year carryback period. And in fact that’s the amount to carry back to, the actual of taxes paid, it’s a little bit greater then that.

So we have $500 million of carryback capacity, we don’t have nearly that amount of NOL in 2009 at this point.

Operator

Your next question comes from the line of Terry Shue – Pioneer Investments

Terry Shue – Pioneer Investments

Going back to Darin’s earlier question on the recovery, the $1.1 billion and you did increase it again in the current quarter what is the confidence level that that will in fact come back to you. What is the process and I think Darin asked about the timing, you’ve booked it but when do you actually receive it.

Edward Chaplin

The amount that was booked was $1.1 billion on a stat basis. The amount that is increased in the third quarter is about $76 million and our confidence level about recovering them is high because in fact they are contractually due amounts so we do expect that they will be recovered. We have litigation that’s ongoing with some of the seller/servicers that actually goes far beyond those contractual claims.

We believe that if we actually reviewed all 470,000 mortgage files that we would find that a very high proportion of them had the same characteristics as those that we have reviewed to date and that ultimate recover would be very much greater then the $1.1 billion that we have recorded to date.

But there is litigation ongoing where we’re seeking to demonstrate that there’s no need to review all 470,000 files and that it is self evident that these transactions should be rescinded and that MBIA should be placed in the position that it was in prior to writing those insurance policies.

So that is the subject of the litigation. To predict the path of litigation that has that much money involved is very difficult. Our best guess based on looking at our own experience and the experience of other large dollar amount commercial litigation would suggest that about a three-year timeframe at the time that we set the recoveries in the second quarter.

So we still believe that that’s an appropriate estimate.

Terry Shue – Pioneer Investments

But there’s the timing is not that much of an issues, its because its not as if you’re going to get any cash. These are just recovery estimates netted against future potential loss payments, am I right.

Edward Chaplin

No on the contrary, we think that the amount of the recoveries is going to end up being—

Terry Shue – Pioneer Investments

Cash in.

Edward Chaplin

Yes, by the time the cases are resolved, the amount of recovery will be greater then the amounts still to pay. And so we would anticipate that there would be a transfer of value.

Terry Shue – Pioneer Investments

Have you estimated some kind of, how the cash flow works or how it is and is there some issue whether or not the servicers in fact have the financial wherewithal to pay, how do we gauge that when you talk about the confidence level.

Edward Chaplin

We have done a credit analysis on each of the seller/servicers and we believe that they are all able to pay the amounts that we’ve currently recorded and we believe that they will have an ability to pay our ultimate claims. Obviously for accounting purposes we’re only taking into account the amount that’s related to files that we’ve actually reviewed already.

Terry Shue – Pioneer Investments

And suffice it to say we’re really not going to know how it all plays out for a while, as you said the path is upwards of two to three years, is that right.

Edward Chaplin

That would be my guess. It may happen along the way that change our views but its likely that this type of litigation will take a meaningful amount of time to resolve.

Terry Shue – Pioneer Investments

Now the other litigation, the one where challenging the formation of National, I’m again, I’m not sure I fully understood the answer you gave to Darin, is that like a next year event or is that also a drawn event.

Edward Chaplin

The central litigation related to our transformation one that we’ve referred to as the Article 78 proceeding in which a group of banks have challenged the decision making process that the Superintendent of Insurance undertook when he approved the transformation.

That proceeding is intended to be expeditious and therefore we would anticipate that it gets resolved sometime in 2010. Its our hope that its in the first half of 2010.

Terry Shue – Pioneer Investments

Who has said that it can be resolved expeditiously, the Judge, or is it some, how does one know that.

Edward Chaplin

All of the sort of legislative intent and I believe the language of the law that authorizes Article 78 proceedings indicate that it is, they are intended to be expedited proceedings for the fact that the Court, where there is a well defined and comprehensive regulatory framework in the state, the Courts will tend to defer to the regulators, in the absence of evidence that the regulators were arbitrary and capricious in their decision making process.

You would think that if they were arbitrary and capricious it wouldn’t take that long to demonstrate it.

Terry Shue – Pioneer Investments

Okay so there in lies your confidence that you think that because it’s a regulatory decision and that Courts tend to side with regulators there, hence your confident, is that how, is that the train of thought. I’m not sure whether or not to have confidence one way or the other.

Edward Chaplin

Yes, it probably wouldn’t be fair to say necessarily that the Courts side with the regulators it is that the system of law is set up so that regulatory decisions can be challenged but they can only be challenged if they’re clearly based on an arbitrary and capricious process.

Terry Shue – Pioneer Investments

One could argue it was arbitrary because the people who are suing you are saying that its arbitrary. So it could argued either way, no.

Edward Chaplin

And that is the argument that the Plaintiffs are saying the Superintendent was arbitrary and capricious, the Superintendent is saying, no I wasn’t arbitrary and capricious and I have a whole record to demonstrate that that’s the case.

So, we think that having that to play out in front of a Judge is a process that is unlikely to take years.

Terry Shue – Pioneer Investments

Right, but you could, it sort of hard to call because court cases are always hard to call so, I don’t know how to assign odds, but suffice it to say there’s no clear cut answer as to whether or not you’ll win or lose, is that fair.

Edward Chaplin

We are highly confident that we will prevail, but the timing as you say is hard to pin down.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Greg Diamond

Thanks to all of you who had joined us for today’s call. We apologize for the technical difficulties. Please contact me directly if you have any additional questions. I can be reached at 914-765-3190. We also recommend that you visit our web site at www.mbia.com for additional information. Thank you for your interest in MBIA, good day and good-bye.

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Source: MBIA Inc. Q3 2009 Earnings Call Transcript
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