MBIA Management's a Safe Short Bet

I have very little confidence in MBIA's (MBI) management. They are literally calling out to the weak handed short sellers that missed their recent 56+ point share drop to just jump on the bandwagon. Management is what you actually bet for when long a stock, and ultimately who you will be betting against when shorting a stock. It appears as if MBIA's management is a safe short bet given this macro environment!

Fitch Ratings-New York-10 March 2008: Fitch Ratings President and CEO Stephen W. Joynt Tuesday sent a letter to MBIA in response to its letter of March 7, 2008 requesting that Fitch withdraw the company's IFS ratings.

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Below is the full text of the letter from Fitch Ratings to MBIA:

March 10, 2008

Mr. Joseph W. Brown
Chairman and Chief Executive Officer
MBIA Inc.
113 King Street
Armonk, NY 10504

Dear Mr. Brown:

I am writing in response to your letter to Fitch Ratings delivered to us this past Friday requesting that we withdraw MBIA's Insurer Financial Strength (IFS) rating, but maintain MBIA's debt ratings.

Regarding the commercial relationship between MBIA and Fitch, as I suggested to you in our meeting on Friday, we are empathetic to the financial and operational stress MBIA is presently undergoing and are aware of the significant cost containment measures you are initiating. We are, therefore, willing to continue our ratings without charge to MBIA. I assume, in the interest of your stakeholders, that you will be seeking and will receive equal concessions and/or sizable fee reductions from both S&P and Moody's.

In addition, I would like clarification of your intentions regarding cooperation with our rating process. You stated in your March 7 press release, and in your letter to us of the same date, that you would like us to withdraw our IFS ratings, but continue rating MBIA's debt securities. Separately, by email sent a day later on March 8 (a copy of which is attached hereto) you requested that we return or destroy key portfolio information and discontinue all use of that information in proceeding with our rating analysis. It seems disingenuous at best to assert in your letter to investors published yesterday, March 9 (footnote 1), that you "intend to work with Fitch to perform the analysis needed to rate [MBIA's] debt securities", while privately demanding return of the portfolio information and materials that you freely provided to support our ratings and that of other rating agencies for many years.

It would appear that rather than "work with Fitch" your intention could be to emasculate our opinion by withholding information and subsequently discredit our opinion as being uninformed.

In your letter, you also state that the value of IFS ratings in today's volatile capital markets is disconnected from individual instruments insured by MBIA and "overwhelmed by the forces of trading markets in unrelated securities." If you believe that, then you should request withdrawal of all rating agencies' IFS ratings.

Your conflicting views lead me to question whether it is the Fitch capital model, rating process or fees that you object to or rather is it that you are aware we are continuing our analytical review and may conclude that, in our view, MBIA's insurer financial strength is no longer 'AAA'.

I believe the central issue is MBIA's financial strength and the value of your insurance policies to investors, not the value of an IFS rating. It seems an unusual first step in attempting to rebuild MBIA's reduced credibility with investors to limit information, decrease transparency
and restrict "informed opinions" (which I believe Fitch has) just because we may not conclude that MBIA is a 'AAA' company.

I believe that the best way forward for MBIA to reestablish the value of its products in the market is to make more information available to more rating agencies rather than just aligning MBIA with Standard & Poor's and Moody's.

For clarification purposes, I ask that you please address the following questions:

-- Will you provide typical management reports, qualitative risk limit information, and other private information (with the exception of portfolio specific details) that are typically provided to NRSRO's by all rated public financial institutions?

-- Do you expect to provide access to management comparable to the access provided by rated public financial institutions?

-- Since you are requesting we continue our public securities ratings, can you affirm that you regard the information and access you intend to provide should be sufficient for a NRSRO to form a reasoned conclusion about the creditworthiness of your company?

We are considering your request that we withdraw the IFS ratings and return the portfolio information you previously provided us and will be consulting with regulators, issuers, investors and our own advisors and expect to announce publicly our views in the next several days.

Very truly yours,
[signed]
Stephen W. Joynt
President and Chief Executive Officer
Fitch Ratings

Footnote 1
-- Available at: http://www.mbia.com/investor/publications/letter_030908.pdf
-- Also Investor Letter: Part 1: http://www.mbia.com/investor/publications/letter_030308.pdf

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MBIA Email to Fitch Ratings

To: , ,
From: "Pastore, Fred"
Date: 03/08/2008 03:42PM
cc: "Chaplin, Chuck" , "Wertheim, Ram"
Subject: Confidential MBIA Information

As noted in our letter delivered Friday afternoon, we request that Fitch remove from its MATRIX model input files all non-public details of our insured portfolio. This includes, but is not limited to:

--the "lower of" ratings information of other rating agencies;

--MBIA's internal ratings for all transactions;

--transaction level insured exposure data (i.e., gross and net par outstanding) and any other risk identification data (e.g., risk sector classifications, maturity date, country of risk);

-- details of MBIA's reinsurance cessions;

-- non-public details relating to MBIA's asset management business.

Since this non public information was provided in connection with the ongoing IFS ratings of MBIA and given our request for Fitch to immediately withdraw the ratings, we request that the use of such information for any purpose be immediately suspended, in particular for use in Fitch's MATRIX model.

Going forward, we do not intend to provide the detailed insured portfolio data necessary to run Fitch's capital model. In accordance the licensing agreement with Fitch, we will return the CD ROM containing the model program files and certify under a separate letter that we have deleted all copies of the program from our network, desktop computers and any other file storage devises.

We also request that Fitch return or destroy all non-public, confidential reports and insured transaction documents. This includes, but is not limited to:

-- quarterly Insured Portfolio Management Report;

-- quarterly Market Risk Reports;

-- MBIA underwriting memos, Offering Circulars, Indentures, Swap Confirms and any other transaction documents relating to MBIA's insured structured finance CDOs.

As we continue to evaluate our 5-year transformation plan, and as Fitch continues to develop its own business in the global capital markets, we expect that there will be opportunities to work with Fitch for ratings on the Company's future insurance entities.

Regards,
Fred

Media Relations: Kenneth Reed, New York, Tel: [phone].

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Comments

[d_sander:]

MBI's mgmt.? Definitely "disingenuous," at best.

I'm impressed with Stephen Joynt. At least he has some integrity. (Of course, integrity should be the very basic bedrock of any rating agency. Without it, what's the point of having a rating agency?! Hear that Moody's and S&P?!)

Barring government bailout, let's face it, MBI will soon be a small footnote in the annals of business history.

2008 Mar 13 03:54 PM

[beachtango:]

Why can't you ever say anything positive about ABK or MBI? Why is everything you and Tillson say on seeking alpha so biased and transparently malicious? At the very least state both sides of argument...
The embattled Armonk, N.Y.-based bond insurance outfit, which has raised some $2.6 billion in capital from private and public investors to appease Standard & Poor's and Moody's Investors Service, believes that it can snatch up new insurance and reinsurance policies from smaller firms that might be facing runoff -- a process in which they collect fees on policies they already insure, but pursue no new business -- or are otherwise hampered, CEO Jay Brown tells TheStreet.com.

"We have a clear opportunity. A number of companies look like they are going to go into runoff," Brown notes.

For his part, Brown has been scrambling since returning to MBIA as CEO last month to breathe new life into the world's largest bond insurance company. MBIA, the largest financial guarantor, and its next largest rival Ambac Financial(ABK - Cramer's Take - Stockpickr) have been swept up in perhaps the most harrowing financial turmoil the debt insurance sector has experienced in three decades. The guarantors have also been the target of short-selling hedge fund manager Bill Ackman, who has lobbed frequent verbal grenades at the companies through the press and his writings.

"Look at all the companies affected the most and you look at how much capacity the firms that have underwritten insurance. They don't have enough capacity," Brown says. Without being explicit, Brown said a number of the smaller guarantors may be susceptible to falling into runoff.

Still, restoring confidence among shareholders continues to be an uphill battle.

MBIA has so far underwritten "very little new business," according to a recent filing with the Securities and Exchange Commission. But Brown is optimistic that the pall surrounding the company will dissipate in the wake of S&P and Moody's affirming MBIA's pristine triple-A rating last month. The CEO also noted that MBIA wrapped up a public finance insurance deal for a $377 million toll road project. But the insurer will likely face further writedowns next quarter in areas tied to mortgage-tainted securities, including home equity mortgages that have dropped recently.

As a part of its restructuring efforts, MBIA announced late Thursday that it was cutting 48 positions, as it retools its structured finance insurance business. Brown's larger restructuring plan involves splitting up MBIA's more risky structured finance business from its safer, more conservative job of insuring debt for municipalities. The CEO has said the split may take up to five years to complete.

Some of the new staffers MBIA plans to hire in the near term will be part of a strategic financial group that will help the firm achieve its goal of underwriting conservative insurance policies. MBIA plans to steer clear of funky structured debt and staffers in its strategy group will help it figure out ways separate out its structured book of business.

Brown has said publicly that splitting up the structured book from the municipal business should help it secure future funding at attractive rates and help restore the guarantor's image to potential clients. At this point, MBIA is trading at a more than 80% discount to its share price a year ago.

MBIA has been adamant about its view that it has sufficient capital -- about $17 billion -- to pay claims should a deteriorating economy result in debt defaults.

NEW YORK, March 11 (Reuters) - U.S. bond insurers' losses are likely much lower than what the troubled firms have reported when marking their holdings to market prices, Moody's Investors Service said on Tuesday.

Shares of bond insurers like MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research), which guarantee payments on roughly $2.4 trillion of debt securities, have fallen precipitously on worries about billions of dollars of claims on mortgage-related bonds they may have to pay out.

In the last six months, Ambac shares have fallen 79.4 percent and MBIA shares have slid 81 percent.

But Moody's approach to rating the guarantors involves trying to determine the "real economic loss" the firms will sustain, as opposed to mark-to-market losses, Moody's analyst Ted Collins said in response to a question on a conference call.

Such loss estimates are "lower than the mark to market that's being recorded," Collins said.

Accounting firms are putting increasing pressure on financial firms to mark their holdings to observable market prices. That has frustrated some firms, which argue that volatile short-term prices can exaggerate actual losses.

If the losses the bond insurers face turn out to be less than expected, that could provide some relief for investors.

Insurers like Ambac have had to write down the value of billions of dollars of credit derivatives, but these write-downs may not necessarily translate into actual losses.

As a result, some players are still confident the firms have enough capital and available funds to pay expected claims.

Tillson, and Middleton....talk constuctively...for a change....

2008 Mar 13 07:29 PM

[afeldman1969:]

How do you recommend people to short a stock that is so far off it's high as is MBIA, and where the book value of the stock probably exceeds the current stock price even if MBIA itself were to go into "runoff"? Why do you think Warburg Pincus poured so much money into the company and Whitman (a well respected investor) keeps increasing the size of his portfolio holdings. This company is worth more than its current stock price dead or alive; once the market grasps that reality (and the mark to market losses get adjustsed as real loss valuations start coming in) shorts are going to get burned but good.

2008 Mar 13 11:58 PM

[mar del pla...:]

I cannot figure out why Tillson and Middleton continue to talk trash about these companies, as they hang on to the coatails of Ackman. Are any of these guys American? Short some foreign stocks for a change. Change your flavor. Leave ABK and MBI alone, write about solutions. Stop manipulating. Let the stocks run their natural course.

2008 Mar 14 02:19 AM

[crashof2008:]

I don't understand why, if MBIA is such an awesome AAA company whose stock has been oversold, that if it goes out to the open market (which Nobel Prize winning efficient markets theory says should be fairly priced) it has to pay 14.75% to borrow capital?

This doesn't sound like a particularly creditworthy rate to me. It seems much more like junk. Yet this is the average price MBIA they paid when they borrowed money recently as part of their restructuring.

Are the markets lying here?

Additionally, the largest bond issuer in the muni market is the State of California. Last week they said that they will no longer insure their new municipal bond issues.

Are you alleging that this dramatic decline in critical new muni business will have a salutary effect on MBIA's bottom line? Apparently New Jersey is now following California's lead.

This of course does not even address the tens of billions (minimum) that MBIA is exposed in the area of CDSs (credit default swaps)!

But then again, you are probably hard pressed to intelligently discuss the dramatic differences between a CDO (Collateralized debt obligation) and a CDS (credit default swap). They are completely different animals.

This is why we are short and you are long.

Best of luck to you.

Care to touch base in a year?

Let the markets decide!

Matt

2008 Mar 14 04:46 PM

[fxtrader07:]

hey Reggie,
you couldn't be more off the mark. Going long a stock betting on good mgmt is a receipe for desaster. going short betting on bad mgmt is, too. rarely heard such utter nonsense in an effort to sound insightful.
true, bad mgmt can ruin the best companies - almost. therefore, buffet (or was it charlie munger?) once suggested to buy only businesses a monkey could run because eventually a monkey will run it. now there are lots of businesses even idiots can run for years without crashing the company. look no further than the u.s. banking sector. I am ready to acknowledge that mbi's mgmt got the company in this mess in the first place. But without a global credit market melt-down that was largely caused by other market participants Ackman and others would long have wetted their pants on their shorts. Your article is 20/20 hindsight. Chances are dismal on the shortt side at current levels and in the current situation everybody and his uncle seems to dream at night of financial armageddon. yeah, right. it will come. but not 2008.

2008 Mar 18 11:50 AM