MBIA and Ambac: Monoline Malaise

Yves Smith at Naked Capitalism had a good post on the financial guarantors. It dealt with MBIA’s  (MBI) new refusal to make a capital contribution to its subsidiaries. Here’s the company’s take on the matter. And here was my comment at her (Yves’) blog:

 David Merkel said…

Were I Dinallo, I would refuse to allow them to set up a new monoline. He has that authority for his own state. I might also take the existing companies into conservation. Then, let MBIA take their spare capital and try to set up a monoline in another state.The commissioners of the other states should refuse them as well, because they mismanaged an insurance company already. They are supposed to check these things when new insurance companies are formed.

Finally, I’m not sure how much good $1.1 billion will do them — If you look at the 2007 10K (page 161), and wipe out their investment in subsidiaries, and take the first quarter $2.4 Billion loss out… let them have the $1.1 Billion, their net worth is still negative.

Now, maybe the loss is at the subsidiaries, so their net worth at the holding company would be near zero. That would still cause them to violate the minimum net worth covenant on their bank debt, if they lost control of their subsidiaries.

The banks could force repayment, and if I were a leading bondholder (calling the major life insurers), I would have one of my lawyers make a courtesy call to MBIA’s lawyers, and suggest that any payment of bonuses could be viewed as fraudulent conveyance.

MBIA is in a bad enough spot, that I don’t see what good keeping the $1.1 billion does them in the long run. Thus, it has to be a short-term gambit.

June 11, 2008 5:56 PM

Here’s the way I see the obligation to send capital to the subsidiaries:

• No, they didn’t promise to shareholders or bondholders that they would do it. It was only their intent.
• But, they probably did make promises to the rating agencies and NY State insurance Commissioner Dinallo.

If I were in the shoes of the ratings agencies, not downstreaming the capital is worth at least another two notches in terms of downgrades. Can the management be trusted? Probably not, which calls into question all the non-verifiable data that they have from MBIA.

If I were in the shoes of Dinallo, I would not allow MBIA to support just one of its insurance companies. I would ask for the $1.1 billion to be contributed so that risk based capital ratios at the subsidiaries would be close to even.

Now, another analyst suggested that MBIA and Ambac should be junk rated. The idea here is that once a financial guarantor goes bad, it is likely that things are even worse. That is supported by the past behavior of the rating agencies and Moody’s own implied ratings as well.

Now, things could be worse. They are worse for Security Capital Assurance (SCA), which could not wriggle off the hook of their obligations to Merrill Lynch (MER). This has negative implications on similar efforts of other insurers to not pay as promised. Even XL Capital, which owns a large portion of SCA, and has guarantees on parts of SCA’s business that was not part of the Merrill suit, fell. It fell because:

• the value of their SCA stake fell
• The value of their guarantees to SCA rose; harder to repudiate.
• General malaise across all financial guarantors.

As a final note, the leverage that MBIA and Ambac had with respect to their market shares has evaporated with the regulators and the rating agencies. Who knows, maybe even with their GAAP auditors… The need to support MBIA and Ambac was greater when the alternatives were fewer, but when you have Berky (BRK.A), Assured Guaranty (give ACE some credit for discipline here), Dexia/FSA, and maybe other new entrants, you can turn your back on everyone else as a regulator. You don’t care about the exotic coverages, and you’re glad they are going away — you just have to clean up the mess. As for the rating agencies, they have reconciled themselves to the idea that all but the municipal enhancement business is dead. So, say goodbye to MBIA and Ambac writing new business. That is over.

Comments

[mahram:]

hi david, I agree with you, that if I were ny state regulators, how I would be able to allow mbia to start another business. If in bad times they were willing to allow their noteholders and clients fall into the wind. And that they have reneg on their deals with regulators. Theres no trust, and in the business of insurance its all about trust. If you put out the public outcry,about the situation it would be impossible for regulators. it would be a pr nightmare. And if I were a ratings agency, it would be tought to justify giving them aaa. Also one note, if I were a regulator, or a rating agency, I would be scared like crazy to think that management is thinking about putting their scarce capital in buybacks or large dividends to shareholders, in a time of crisis. If I were a cynic, this would be an attempt by management to bail out their losing stock positions, and not to save the company.

2008 Jun 12 01:01 PM

[Ishortyou:]

I would probably save the damn cash as a back up, deleverage from the annoying debts, stop dividend payments to increase the book value of the company against debt. Once the book value is stable and adequate then demand a triple A status to write new stabel muni business and a year or so, oh and yeah...send Danillo to take a hike if he wants to.

2008 Jun 12 01:29 PM

[mythoughts:]

Who needs MBIA or Ambac, since Buffet has entered the bond insurance arena? He has the assets and intergity required to do this kind of business.

2008 Jun 13 01:14 PM

[paulibloom:]

Fools welcome to hardball it cuts both ways. Silly analysis. why should a company throw good money after bad-you are delusional to think they will do that. Think about another insurance business with shareholders getting a new piece of paper and big financial backers. I do not know what MBI is worth but you guys are basically asking the company to commit suicide-like I said this hardball - will not happen. Now think again.

2008 Jun 14 09:22 PM

[oldlures1:]

I don't blame MBIA for refusing the move the funds. It seems like a reasonable (and sensible) business deicision, particulary under the circumstances.

This whole charade that has played out over the past six months reminds me of the well-known Peanuts scene where Lucy holds the football for Charlie Brown. Charlie continues to trust Lucy; and when he doesn't she manages to convince him that this she'll really hold. So, they reach an agreement; she'll hold the football and he'll kick it. But everytime, Charlie gets prepared, runs down the field, gives it his best shot and, at the last minute, Lucy moves the ball. In this case, Lucy is played by the rating agencies, and MBIA is Charlie Brown. MBIA is tired of Lucy's lies and misguidance, so he's taking his ball and going to play somewhere else.

MBIA will get AAA status again; either by virtue of a new AAA-rated start-up, or it'll regain it's original AAA status in 12-18 months by virtue of reduction in its liabilities. And in the meantime, despite all the unsubstantiated garbage you read from the biased propogandists trying to manipulate, policyholders will be just fine.

Again, I don't blame them; not at all.

2008 Jun 14 10:45 PM