MBIA on the Hook for $7.4 Billion Following Moody’s Downgrade

By Jennifer Yousfi

After a recent credit-rating downgrade, MBIA Inc. (MBI) must come up with $2.9 billion in possible termination payments, as well as an additional $4.5 billion in collateral to stabilize guaranteed investment contracts (GICs).

Many investment contracts have minimum collateral requirements that go into effect in the event of a credit-rating downgrade. MBIA has roughly $15 billion in assets to meet the collateral call.

“We have more than sufficient liquid assets to meet any additional requirements arising from any terminations or collateral posting requirements,” MBIA said in a statement last week after the downgrade.

MBIA shares took another hit on the news, as the stock dropped 11% with a 66-cent decline to trade at $4.93 at noon in New York. The stock had already shed 13% on Friday, after Moody’s Investor Services, the credit-rating arm of parent Moody’s Corp. (MCO) downgraded MBIA Insurance from “Aaa” to “A2″ late last week.

“MBIA is leveraged through their own rating and that can make a downgrade very harsh,” Matt Fabian, a senior analyst with Municipal Market Advisors, told Bloomberg News. “It’s very hard for an outsider to piece together the impact of these downgrades.”

One of the main reasons for the downgrade, which follows similar credit-rating reductions of MBIA from Standard & Poor’s and Fitch Ratings Inc., is the large number of credit default swaps (CDSs) on complex collateralized debt obligations (CDOs) that MBIA insures.

As the subprime mortgage crisis has unfurled, the underlying assets of the CDOs have become exponentially more risky, leading to almost $400 billion in write-downs throughout the global financial industry so far.

The bond insurers, including MBIA as well as rivals Ambac Financial Group Inc. (ABK) and FGIC, are in desperate talks with banks to tear up contracts that amount to $125 billion in mortgage-backed debt, The Financial Times reported. The so-called monocline firms are hoping to commute the contracts through a one-time payment that will release the insurers from honoring the full-value of the assets, should they default.

“If firms and their counterparties can get across the finishing line in their commutation negotiations, a shadow of uncertainty would be lifted from the monoline sector, with the prospect of better rating stability,” Matthew Elderfield, chief executive of the Bermuda Monetary Authority, which regulates a number of bond insurers, told The Financial Times.

Comments

[Ishortyou]

In respect to AMBAC and MBIA, they need to keep and save all the cash possible including stop paying dividends, deleverage from all their risky liabilities specially those CDS, CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts.

They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.

[crashof2008]

Some of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

[crashof2008]

MBI does NOT have 15 billion to meet the cattle call. Wrong! They must meet this margin call with AA rated securities.... their statement said (READ IT CAREFULLY!) that they had 10 billion in securities rated AA "ON AVERAGE".

What does the word "Average" mean in this context. Think about it. It's far worse than you understand. That is the key word in this whole scandal.