Why MBIA's Change of Plans Makes Sense

Yves Smith is very unhappy about the fact that MBIA isn't throwing $1.1 billion of its shareholders' money into the black hole that is its insurance subsidiary. She calls the decision "shameful" and "scandalous", but it seems simply sensible to me.

As MBIA CEO Jay Brown explains, now that the insurance subsidiary no longer has a triple-A rating, there's no point in trying to shore it up with new capital in order to retain that triple-A rating. Instead, he would like to "use one of our two fully licensed subsidiaries as a Triple-A subsidiary for new public finance business".

MBIA is a monoline insurer, after all, and if it's going to be allocating capital to an insurer, it should be allocating capital to one with a triple-A rating and good prospects of profitability going forwards. Alternatively, if it can't put the capital to good use, it should return it to shareholders in the form of equity or debt buybacks - an option which Brown is leaving open.

But there's really no point at all in injecting extra money into the old insurance company which is now going into run-off -- especially since, as Brown writes:

The change in ratings does not trigger any liquidity issues for MBIA Insurance Corporation, as the construct of our business model has been specifically designed to protect against any liability acceleration from ratings downgrades.

In other words, the insurance subsidiary doesn't need the money in order to continue operating in run-off. The only reason to recapitalize it would be to keep it operating as a going concern, writing new business - and that's clearly not going to happen, now it's lost its triple-A.

Much better, then, that the money be used elsewhere instead.

That said, however, there has been a significant drop-off in Brown's letter-writing abilities. He's now started slipping into jargon occasionally, which has got to be a bad sign:

Given that the agencies have taken the option of maintaining the Triple-A rating of MBIA Insurance Corporation off the table, we have turned our attention to what are the best steps we can take to increase shareholder value while maintaining our human resource strength and adequate capital for our existing policyholders and proceeding with our transformation plan to operate multiple business entities under a different franchise structure.

Still, he remains a much better letter writer - and leader - than the overwhelming majority of other CEOs. If I were an MBIA shareholder, I wouldn't be happy about the stock price performance. But I wouldn't be unhappy about Brown personally.

Comments

[Ishortyou:]

No point for MBIA to use this capital to mantain a tirple A rating if the politics-untransparent... changing driven rating agencies have taken off their triple A status. Now a new wave of write downs are coming due to this unjustifiable move from the rating agencies and everyone will pay for this eventually

2008 Jun 12 11:48 AM

[Boruma:]

Most investors who have traditionally bought muni and public infrastructure bonds from the likes of MBIA would be insane to reward the company by once again paying away part of their return for New MBIA and for this reason it is a bad use of the $900m. I would also not downstream the cash - not until some stability returns to the market. So if waiting for a year is an option I would consider it to be more appropriate from having yet another failure.

2008 Jun 12 11:58 AM

[Ishortyou:]

Well I would probably keep the cash as a back up, deleverage, and increase my book value in the run off period. Then I will demand my triple A status backed up by my new book value and start doing business again next year or so, oh and yeah, send Danilo to take a hike if he wants to.

2008 Jun 12 01:25 PM

[wobatus:]

Boruma, no one bought muni bonds from MBIA. MBIA insured the bonds.

2008 Jun 12 02:05 PM

[oldlures1:]

I agree, it's a sensible decision. It's a business decision.
Perhaps I'm a bit naive, but I remain confident that MBIA (or a subsidiary) will regain AAA status in the not-to-distant future. Frankly, I've seen nothing yet (i.e. hard evidence) from the rating agencies to support losing it in the first place, but I digress.
As a shareholder, I truly believe that CEO Brown, along with the Board and the faithful supportive employees, will ensure MBIA's viability and long-term prospects for shareholders. Just keep your eyes on the horizon.

2008 Jun 14 07:58 AM