MBIA Plummets on CDO Exposure; Analyst Sees Buying Op.

Shares of bond insurer MBIA (MBI) dived more than 26% Thursday morning after the company said on its website late Wednesday it has exposure to $30.6 billion in collaterialized debt obligations [CDOs] it insures, including $8.1B of complex, risky securities backed by home loans, also known as CDO-squared (CDOs of CDOs). In a subsequent research note, Morgan Stanley analysts called the $8.1B exposure "massive." "We are shocked that management withheld this information for as long as it did. MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors," they said. "This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' relative to Ambac (ABK)."

On Wednesday, S&P affirmed MBIA's AAA rating, but put it on a negative watch. S&P Ratings said Thursday the exposure announced was already reflected in its analysis. MBIA said on its Web site that it "supplemented the listing of its exposure to CDOs that include RMBS (residential mortgage-backed securities) as of Sept. 30, 2007 to make it consistent with the CDOs that were included in Standard & Poor's analysis."

Citigroup analyst Heather Hunt says the selloff is overdone: "MBIA disclosures of additional $8.1B of CDOs with underlying CDOs a disappointment, but the exposures are already accounted for in the rating agency reviews... S&P estimates MBIA's CDO losses could be $1.49B on $30B of CDOs... We estimate over $7.5B after-tax losses are priced into the stock." She concludes, "This is an extremely volatile situation, but we believe that as more information comes out, the exposure will not be as bad as it seems."

Sources: MBIA CDOs (.pdf), S&P report (.pdf), CNBC, Wall Street Journal
Additional Reading: The Bond Insurance Barge Scam • MBIA Could Be a Zero Faster Than Expected

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