MBIA Waits for Good News to Announce Bad

MBIA (MBI) issued two press releases after the close Wednesday:

• MBIA Provides Updated Information on 2007 Financial Results
• MBIA to Issue $750 Million in Common Stock

Some initial thoughts:

1) It's so classic of MBIA: whenever they have bad news to announce (in this case, a doubling of unallocated loss reserves from $100M to $200M, just on HELOC and Closed End Second exposure), they always wait until there's some good news (a stock offering backed by Warburg, $250 million larger than expected) so they can announce both at the same time, in the hopes that no-one will notice the bad news.

2) Even within the bad news press release, MBIA announced what appears to be good news, a $110 million gain (gee, what a coincidence that this is so similar to the amount of the increase in losses):

In addition, the Company stated that it will decrease its previously announced fourth quarter pre-tax mark-to-market net loss and foreign exchange by $110 million. This reduction stems from a $400 million Money Market Committed Preferred Custodial Trust securities ("CPCT Securities") facility created for the primary purpose of issuing CPCT Securities and investing the proceeds in high quality commercial paper or short-term U.S. Government obligations. This soft capital facility constitutes a financial instrument which is required to be fair valued ("mark-to-market"). Accordingly, the Company also said that it had a $110 million mark-to-market gain on this facility during fiscal 2007.

It's important to understand, however, that while the $100 million loss is very real, the $100 million gain is not -- it's a non-cash gain that, ironically, stems from the decline in the value of MBIA's own debt!

3) The stock is up to $15.35 after hours, which is ludicrous. Why would anyone pay more than $14.91 ($750 million divided by the 50.3 million shares that MBIA is offering)? In fact, if someone were clever, they could short the stock at $15.50 and cover at $14.91 and lock in a virtually risk-free profit.

4) Interesting to see that MBIA and Warburg are not doing a rights offering and MBIA instead is issuing stock with a Warburg backstop via a "convertible participating preferred stock". This is better for Warburg, as they are getting preferred stock, which (until it's converted) is senior to the common equity -- not that it will matter a bit in the end...

5) I can't figure out who would participate in this offering -- I'd guess that Warburg ends up putting up nearly all of it. Presumably MBIA knows this, so it raises the question why is MBIA going through the process of the offering -- why don't they just sell directly to Warburg, as they did with the first $500 million, or do a rights offering? I think the answer is that Warburg already now owns 15% of the company and another big sale to Warburg, either directly or via a rights offering, would require a shareholder vote. They get around this the way they're doing it now because Warburg is getting preferred stock and it won't convert without shareholder approval. Another reason for not doing a direct sale is that if the stock were to rise a lot, shareholders could sue, saying they weren't given the right to buy at the lower price.

6) The only people who might buy at $14.91 are those who believe that the $750 million will be enough to persuade the ratings agencies to reaffirm MBIA's AAA rating. I can't imagine this, based on the aggressively negative things the ratings agencies have been saying -- heck, yesterday Fitch basically said they were going to downgrade no matter how much MBIA raised. Keep in mind that everyone already knows about the $500 million, so there's only an extra $250 million, plus MBIA just acknowledged $100 million in additional losses, so this announcement today only results in an incremental $150 million (and not all of the $750 million will go to the insurance sub -- MBIA only says "most").

7) Most importantly, increasing the unallocated loss reserve from $100 million to $200 million and raising another $750 million is laughable, given the massive losses MBIA faces.

As a simple example, they're on the hook for $9 billion of CDO-squared exposure alone (not to mention all sorts of other massive, toxic exposures), for which they've taken a mere $200 million impairment, which is likely to be nearly a total loss. Merrill marked down its CDO-squareds by 57% as of the end of the third quarter. More recently, I spoke with someone earlier this week who has an enormous individual-mortgage-level database that mirrors the one Ackman released last week and he said: a) these CDO-squareds are "zeros" and b) that the model Ackman released (which showed more than $12 billion of real cash losses each for MBIA and Ambac (ABK)) is conservative -- his model shows even higher losses.

Editor's Note [2/10/08]: The author is short MBI and ABK.

Comments

[Victhom:]

Wall Street NEWS....OUCH!!!

Rescue Plans Won't Prevent Downgrades
By Karen Richardson, Liam Pleven and Carrick Mollenkamp
Word Count: 931 | Companies Featured in This Article: MBIA, Financial Guaranty Insurance, Credit Agricole, UBS, Citigroup, Barclays, Security Capital Assurance
Rescue plans are starting to take shape for struggling bond insurers, but they aren't likely to prevent further ratings downgrades for many of the companies.

At least one such company isn't waiting around. In an effort to raise capital, MBIA Inc. yesterday said it would issue $750 million of common stock, a bigger offering than the $500 million issue it had initially planned.

The company also said it will revise its fourth-quarter loss of $2.3 billion, cutting it by $65 million. MBIA also added $100 million to its loss reserve, bringing the total special addition to $200 million

2008 Feb 07 02:59 PM

[PlentyOStocks:]

So according to you: a reserve which is only an estimate of a possible future loss (that may never happen) is very real; but the change in the value between currencies on a date certain is not real? I guess I will not be investing in any of your mutual funds. You do not know which side is up.

2008 Feb 07 04:30 PM

[Gershinator:]

You should post on seekingalpha more often.

Very informative article. The smart longs should be reading.

2008 Feb 07 04:46 PM

[helplessobs...:]

One thing you can count on is the monolines will have their munibond portfolios stripped out and transferred to solvent hands. Bankruptcy will then relieve them of their CDO obligations with the lossses being spread out to the CDO holders. Like portfolio insurance of the '80s where stock owners thought they could outsmart the futures players this form of insurance is an illusion.

2008 Feb 07 09:35 PM

[mwphnh:]

CDO squared even if worth zero does NOT yield 9bn loss on a PV basis as they only guarantee ULTIMATE payment of principal; which can be 30 years down the road; and is worth a small fraction - cents on the $$ - in losses. The interest payments they would have to pay are negligible in the interim; usually less than 100bps. These guys are talking their shorts up and are looking to cover.

2008 Feb 07 09:53 PM

[fxtrader07:]

who's buying? well, third avenue might.
shorts(ackman) als well as value-longs (3rd avenue, whitman) make quite convincing cases
i will never understand though, why a retail investor would want to bet on a stock like mbi where there is zero visibility and which is certainly not within the circle of competence of the ordinary stockmarket investor

2008 Feb 08 04:40 AM

[d_sander:]

Can you please disclose your positions, if any, in MBI and ABK?

2008 Feb 08 12:27 PM

[madling:]

His funds are short MBI and ABK
www.ft.com/cms/s/25836...

seekingalpha.com/page/...
"In keeping with this authorial independence, authors are required to disclose personal positions in stocks they write about."

2008 Feb 10 06:35 AM

[SA Editor J...:]

From the Seeking Alpha Editorial Team: The initial omission of Whitney Tilson's disclosure was our fault and we would like to apologize for any confusion this may have caused.

2008 Feb 10 02:26 PM