A Mortgage Meltdown for MBIA by Jonathan R. Laing
Summary: Pershing Square Capital Management says bond and debt insurer MBIA's (NYSE:MBI) AAA-rated $1 trillion portfolio could be endangered by $7.7 billion in subprime mortgage backed securities [MBS] — specifically the $2.4b in collateralized debt obligations of mixed "mezzanine" level bonds (up to BBB) and higher A-level bonds. The ABX subprime performance index has fallen 40% since January, and foreclosures are mounting. Since the BBB-rated MBSs have just 7% collateral from the mortgage pools backing them, anything over 7% in securitized losses would crush BBB bonds. Some analysts forecast an industry-wide 10% loss on subprime loans, which would decimate mezzanine CDOs, and could strip 65% off A-rated bonds. MBIA says its subprime CDOs are highly and diversely collateralized, but MBIA has previously fudged losses from money-losers like Eurotunnel and Allegheny Health bonds by spreading payouts or using third parties for reinsurance. Credit agencies enjoy significant revenues from MBIA, so they're unlikely to downgrade it. Pershing is short MBIA, but investors Third Avenue Management and Dodge & Cox like its low 10.4 P/E on 2007 earnings. Barron's Bottom line: If subprime losses mount, MBIA could take a $500m loss or have to dilute stock to raise collateral.
MBI 1-yr. chart: