What's Going on with MBIA's Stake in Channel Reinsurance?

What I report is nothing new, but I have not seen anyone else call it for what it is: a massive violation of GAAP and common sense accounting. At issue is Channel Reinsurance, a reinsurer that is 17% owned by MBIA (MBI) [$16.36 0.00%, market cap: $2.051B]. MBIA has already written down the value of its investment in Channel Reinsurance to $0.

If MBIA thinks that Channel Reinsurance has no value, it should certainly not be counting on the company to reinsure over $40 billion of bonds. In that case MBIA should take a portion of those bonds back onto its own balance sheet or take a reserve against money it may not be able to recover from Channel Reinsurance. Its failure to do so makes its situation look less precarious than it is. This is fraud, pure and simple.

From the New York Times:

A big issue facing MBIA is the fate of a Bermuda-based company, Channel Reinsurance, in which it owns a 17 percent stake. MBIA is counting on Channel Re to cover losses on $43 billion of securities. MBIA has written down its stake in Channel to zero to account for the declining value of its insurance contracts, and Moody’s Investors Service is considering downgrading the reinsurer’s triple-A rating.

Disclosure: I have no positions in MBIA, although I am long BRK-B, which has recently started a competing bond insurer.

Comments

[helplessobserver]

Your investment in BRK.B is wise. Why be roadkill when you can soar with the vulture? In the back channels I suspect plans are being made for a major financial company failure. Boiler pressure is is extraordinary.

[iviewer]

This has not been called the way you describe it as it not a violation of GAAP but an absurd consequence of GAAP rules. They are forced to recognise MTM on derivative positions which likely will never be realised. I agree, though, that it is not common sense. MBIA, like all of Channel's investors has to hold the investment at zero value because the negative mark exceeds other sources of equity capital, but it is untrue to say that they think it has no value.

Furthermore, it is entirely possible for an insurance company to suffer losses equal to its equity capital and still pay out on every insurance claim.

[Michael Goode]

Iviewer, yes it is possible for the equity to be wiped out but the claims paying ability to remain. It is not, however, likely.

[nickgogerty]

any thoughts on the downgrade impact to MBIA.