MBIA's GIC Exposure Could Trigger a Liquidity Crisis

MBIA was down 26% this week -- and I'm surprised it wasn't more, given the news last Thursday and Friday.

In Bill Ackman's presentation last Wednesday (which is posted at www.valueinvestingcongress.com), he revealed an area of exposure for many of the bond insurers that I hadn't previously been aware of: Guaranteed Investment Contracts (GICs). I knew MBIA had an investment management division that sold GICs, but didn't fully understand their structure and how toxic this business can be in the event of a downgrade. It's really quite ironic that everyone (myself included) has been so focused on the company's structured finance exposure, but something out of left field like GICs might be what triggers a liquidity crisis that takes the company under.

Allow me to explain what a GIC is. Let's say a municipality like Wichita does a $100 million bond offering to build some schools (or bridges or whatever). Immediately after the offering, it has $100 million in the bank, but it doesn't need all of the money up front. Instead, as the schools are built, it pays the costs over time -- let's say $25 million per year.

MBIA (and many other bond insurers) of course have relationships with countless municipalities, so they set up investment management divisions to tap these relationships and help municipalities invest the money they raised so they could earn some extra return. (In many cases, the bond insurer offers a package deal in which it wraps the bonds and also invests the proceeds -- possible illegal tying, but that's another story.) The produce the bond insurers sold to the munitipalities was a guaranteed investment contract, which was of course marketed as 100% safe, secure, liquid, triple-A, blah, blah, blah (you see where this story's going, don't you? Think auction rate securities...).

A GIC would typically be structured to pay out over time -- in the case of the example above, Wichita would give MBIA the $100 million it had just raised and in return MBIA Asset Management would give Wichita a GIC that promised to pay out $25 million per year plus interest a tiny bit higher than what Wichita could have earned by putting it in Treasuries. MBIA Asset Management (part of the publicly traded holding company) would, in turn, have MBIA's insurance sub provide 100% financing, taking advantage of its AAA rating (and taking all of the risk; more non-arm's-length dealings...), and the MBIA holding company would simply pocket the spread. Finally, MBIA would invest the money in various securities, attempting to match their duration with the expected payout timetables of the GICs.

A nice feature of this set-up for MBIA was that it sold a steadily increasing amount of GICs, so it could pay off maturing GICs with incoming cash from new GICs -- not a Ponzi scheme, because there are assets backing it up, but the liquidity characteristics of the GIC business allowed MBIA, if it wanted (or if it got sloppy or greedy), to invest the GIC assets in illiquid and/or long-dated securities.

This was a wonderful business for everyone as long as markets were tranquil, assets were liquid and held their value, MBIA's customers continued to buy new GICs and, critically, MBIA maintained its AAA rating. None of these things are true today, however.

In particular, many GICs have a clause that says if MBIA is downgraded, it had to immediately repay or post "eligible collateral" on most or all of the GIC. Sure enough, MBIA was downgraded five notches by Moody's last Thursday and, as a result, on Friday after the close, MBIA released the following statement:

As a result of the downgrade to A2, MBIA expects that it will require $2.9 billion to satisfy potential termination payments under Guaranteed Investment Contracts (GICs). In addition, MBIA expects to be required to post approximately $4.5 billion in eligible collateral to satisfy potential collateral posting requirements under GIC's as a result of the downgrade. MBIA Inc. has total assets of $25 billion related to its ALM business, of which $15.2 billion is available to satisfy these requirements including approximately $4.0 billion in cash and liquid short-term investments; $1.0 billion of unpledged eligible collateral on hand; and approximately $10.2 billion of other unpledged diversified securities with an average rating of Double-A. In addition, MBIA Inc. also has available another $1.4 billion in cash, including the proceeds of its recent equity offering.

Translation: "Contrary to everything we've ever said about no accelerating liabilities in any part of our business, we now have to immediately come up with $7.4 billion of cash and eligible collateral (U.S Treasury or agency securities, with appropriate haircuts -- roughly 5%). But don't worry, we have $25 billion of assets..."

$25 billion of assets to cover $7.4 billion of liabilities sounds reassuring -- perhaps that's why the stock was up on the open Monday (giving us the opportunity to short more) -- but in reality MBIA is in big trouble because it never expected to have to come up with huge amounts of cash on short notice. Here's why:

When MBIA says that it has "$15.2 billion is available to satisfy these requirements", it means that $9.8 billion of its ALM (Asset/Liability Management) business assets are already collateralized. And there's not really $15.2 billion left to meet the collateral call -- that's based on MBIA's cost, but according to MBIA's own filings, this was impaired by $1.4 billion as of 3/31 -- and the actual impairment today is surely much greater, for two reasons: 1) prices of these securities have declined this quarter and 2) the estimated values are based on an orderly sale, not a rushed sale to meet a collateral call (speaking of which, I spoke with a senior fixed income trader today who said there are lots of sellers but absolutely no buyers for fixed income securities, as financial firms are looking to reduce their holdings going into the close of the quarter).

In reality, as MBIA admits in its press release, it has only $5 billion in cash or cash equivalents in its ALM business, plus the $1.4 billion recently raised by the holding company (no wonder it didn't downstream the $900 million!), so it needs to come up with another $1 billion from the "approximately $10.2 billion of other unpledged diversified securities with an average rating of Double-A" -- not an easy thing to do in this ghastly market.

Can MBIA come up with the $7.4 billion it needs to pay off a lucky subset of its creditors? Sure, but only by pledging all of its cash and selling its best, most liquid securities, which is exactly what it's doing right now according to the article below that just came out on the WSJ web site. But what about all of its other creditors -- the holders of GICs and medium term notes that come due next month (and the month after that and the month after that) -- which are secured by increasingly low-quality, illiquid assets?

This is the kind of liquidity crunch that has led many financial companies to file for bankruptcy. If MBIA were to do so, it would obviously wipe out the equity, but it would at least treat all creditors fairly rather than early ones getting paid in full and later ones left holding the bag (this is the same issue that exists for policyholders at MBIA's insurance sub as well, by the way).

When MBIA finally sinks beneath the waves, its management, board, analysts and defenders will surely cry that no-one could have predicted this perfect storm, yada, yada, yada, but in fact Bill Ackman spelled it all out five and a half years ago in 66 pages of excruciating detail in his original presentation on MBIA, Is MBIA Triple A? (attached), in which he concluded:

A two-notch downgrade could have catastrophic consequences for the company. It would likely create problems for the renewal of MBIA’s SPV commercial paper. It might also cause a reduction in the value of all of MBIA’s wrapped obligations including all of Triple-A One’s assets. The decline in values of these assets, in turn, could trigger covenant defaults in the SPV’s liquidity facilities, further exacerbating its immediate liquidity crisis.

 

Additionally, Moody’s reports that MBIA’s ISDA documentation contains increasing collateral requirements in the event of a downgrade of the company. The company’s municipal GIC portfolio also has rating downgrade triggers. 86 Perhaps most significantly, a downgrade could shut off a material percentage of the company’s cash flow, for MBIA may be unable to write new premium without a AAA rating.

 

A Barclays Capital research report which is available on MBIA’s website explains:

Spiraling down…down…and down?

In the event of a financial guarantor being downgraded, will a vicious circle lead to rapid rating deterioration and potential bankruptcy? This is a much-debated question in that a financial guarantor who relies on its credit ratings for its business franchise could face a rapid decline in new business in the event of a downgrade, which could precipitate further downgrades.

 

It appears to us that an actual or perceived downgrade of MBIA would have draconian consequences to the company and create substantial drains on the company’s liquidity. The self-reinforcing and circular nature of the company’s exposures makes it, we believe, a poor candidate for a AAA rating.

 

In light of MBIA’s enormous leverage, the company’s credit quality, underwriting, transparency, accounting, and track record must be beyond reproach. The company can simply not afford any significant risk of loss in its nearly $500 billion of net par exposure, for a mere 20 to 35 basis points loss would equate to levels sufficient to cause a rating agency downgrade of the company.89 In addition, and as importantly, the company must have minimal liquidity risk. Based on our research, we conclude that MBIA fails to meet these standards.

The irony is that if MBIA had listened to him -- even as recently as two years ago! -- the company would probably be doing fine right now. Instead, it chose to ignore and attack him (and, full disclosure, me as well, to a much lesser extent), so forgive me for feeling a bit of Schadenfreude.

Disclosure: Author manages funds that are short MBIA

Comments

[crashof2008]

Consider MBI's curious phrasing that they have "$10.2 billion of other unpledged diversified securities with an AVERAGE rating of Double-A"

There are different ways to calculate "average rating" here. That is MBIA's wiggle and weasel word of choice.

As I understand most of these contracts, they demand a minimum of AA collateral to meet a margin call.

Given MBI's history of deceptive practices, I note the following about that rather odd phrase "average rating":

If i had:

100 bonds with a $1000 coupon rated one notch ABOVE AA
AND
100 bonds with a $1,000,000 coupon rated one notch BELOW AA

I would have over one hundred million dollars in securities that "averaged" a AA rating.

Because I had 100 bonds ABOVE AA and 100 bonds below AA.

Of course that would be terribly misleading.

And I would only have 100,000 dollars in bonds that could be used as collateral. But I could proclaim I had over 100 million dollars of bonds with an "average" rating of AA.

The words "average rating" are highly suspicious here. I smell a rat.

Matt

[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.

[Tim Travis]

Considering that $9.3 billion of the total $25.1 billion of liabilities are not subject to flexible withdrawals or downgrade triggers, and the overall quality of the investment portfolio, liquidity issues are virtually non-existent.

From your article:
"Translation: "Contrary to everything we've ever said about no accelerating liabilities in any part of our business, we now have to immediately come up with $7.4 billion of cash and eligible collateral (U.S Treasury or agency securities, with appropriate haircuts -- roughly 5%). But don't worry, we have $25 billion of assets...""

When questions were asked about the financial guarantee business MBIA did state that they were not subject to any accelerating liabilities and even after the downgrade that has obviously been true. If you took the time to read the May 12th Conference Call Presentation pages 20-22 you would see that MBIA was very clear in relation to the effects of a downgrade on the GIC business. The fact that your "translation"... of alleged fraud is so obviously careless points to one of two possibilities.

1) Your research is so negligent that it would ignore the effects of a downgrade on this GIC business when it is spelled out in an investor’s presentation for all to see on the MBIA website. (Perhaps following Ackman has made you more accepting of the final result in which you don't feel that you have to put in the proper time.)

2) This like other write ups by the likes of Ackman and followers are blatant attempts to conjure up the worst fears in an already panicked market by distorting facts and conjuring up alleged corporate frauds, to reignite the downward spiral that this uncertainty in the bond market has caused.

Why don't you write a column on the assumptions being made in the Asset Backed Securities Market to validate the current pricing? Let's asses how realistic these prices are in relation to various historical precedents. The beauty of the insurance business is that they are not forced to sell their CDS exposure like banks do to maintain their capital ratios so the MTM losses are strictly an accounting notion and nothing more. Just as they are passed through the income statement they will come back again as the prices of the ABS indexes rally in the future. It seems very odd to me that so called "value investors" like yourself and Ackman put so much faith and validation in indexes that are subjected to the vagaries of technical analysis and momentum trading techniques. Either you are the new flag bearers for EMT or you are purposefully being misleading in your analysis. Now MBIA was probably never worth $80 and is now worth a lot closer to $20 or $30, but to publicly brag about shorting at $5 on a public website should lead to an interesting note on financial commentators when the books are written on the current financial crisis.

I have no problem with short selling or talking your own portfolio but I think that both you and Ackman have been far more disingenuous and misleading in your dissertations then either MBIA or Ambac have been. It's allowed me to buy at far cheaper prices then I ever thought I would be able to so I have no qualms about it but it would be nice to see a little more merit and integrity in your fear mongering then the current offering.

[crowdofcheerleaders]

maybe investors will one day realize that MBIA has a completely needless service. as it stands in the market, the corporation is only a trading vehicle. once it dumps all those municipal bonds, it won't even be a trading vehicle. it will have nothing. but then again, that doesn't stop investment banks from being a worthless investment vehicle, does it? no. just another story of "when does the music stop".

i am very well aware that the trading market is one thing and real life/economy is another thing. but real life does have a way of catching up to worthless corporations such as life. a corporation chock full of economic MBAs and PhDs that offer no actual service.

[squashnut]

Fine article. Tim Travis notes that MBIA said in a May 12 conference call that they were not subject to any accelerated liabilities from GIC's. I guess he conveniently ignored the part about Friday's press release quoted above. Selective reading won't make you a profit.

[Mbuna]

It's nice to see a little dose of reality here but I wonder what it will take for someone with a larger platform start to speak out on the culture of lies and denial that is now so prevalent in the financial sector. There are so many white elephants in the room it is practically a frickin stampede! One example- it has been clear for around 6 months that Citibank was insolvent. Where was (is) the press coverage of that fact? The facts are there if you wade through the BS but there is some kind of taboo about telling the truth. Everyone knows all these quarterly reports are anything but truthful. It has reached the point of absurdity in my opinion. Just look at this person trying to defend MBIA. Does anyone actually believe he is sincere? Was he put up to it by someone else? All that anger indicates someone has a lot at stake here. His point number 2 is classic- suffering the heartbreak of "alleged corporate fraud". How much more cartoon like will this all get? What will it take for everyone to get over their denial?

[Ishortyou]

Well the situation is simple like any other business they have to remediate their books, they dont have much of a choice really and it doesnt take a rocket science to figure this out, remediate their books from those toxic liabilities is probably the only choice at the moment, thats of course is the housing market doesnt recover first.

[crashof2008]

Tim Travis makes a classic mistake above when he insists on continuing to rely on historical precedent to value these derivatives.

Tim does this when he says:

"Why don't you write a column on the assumptions being made in the Asset Backed Securities Market to validate the current pricing? Let's asses how realistic these prices are in relation to various historical precedents."

Tim, historical volatilities being used to input pricing in these derivatives was a major cause of what got us into this mess in the first place!

These are NOT normal times and asset prices are NOT distributed along a bell curve. Check out Volcker's recent speech before the New York Banker's Club that touches on this subject. We are continuing to have MAJOR sigma 4 and sigma 5 events (4 and 5 standard deviations from the norm) every 10 years and each one is worse than the previous one!

Those methods have FAILED the test of the market, as Volcker says.

Stock and derivative price distributions now have MUCH fatter tails, in Cauchy (not Gaussian) distributions and we need to use implied volatilies much more in assessing what these weapons of mass destruction of the financial system are really worth.

And they aren't worth much.

750 TRILLION dollars in derivatives crashing is not a pretty sight.

And to assume that this crash will follow historical price distribution precedents is irresponsible in the extreme, especially in judging how one of the most irrresponsible set of valuations in the monolines will ultimately be valued in the marketplace.

Jingle mail was not in your models. But it is the reality.

[Budlab]

For me, this is an informative article. I do not know much about this situation, but I appreciate the debate and discussion it created. A bit too much math for a simple guy like me, so I will pose a simple question in order to keep the discussion easy to understand:

If half the clients or lenders wanted their money out by the end of one week, how much "real free cash" is remaining?

I do not own any of the above mentioned companies.
(A small plug for my book; go to frips.com)

[crashof2008]

Here is a link to Paul Volcker's speech where he decries the folly of using past historical data to value derivatives (as Mr. Travis above is suggesting) as having "UTTERLY failed the test of the market.

www.youtube.com/watch?...

www.youtube.com/watch?...

No one has the credibility of Volcker on these issues, save perhaps Janet Tavakoli who has contracted out as a special consultant to the Fed on structured finance issues.

These videos of Mr. Volcker's are a must see and present the scandal of these weapon of mass destruction of the financial world (and their false valuations based on "historical" precedent that go with them) in easy to understand layperson language.

[TN hick]

any who else [ABK, ???] have material quantities of GIC's on their books?

[helplessobserver]

crashof2008 has it right. In school all these guys worked out the assigned problem using "normal or historical data" and the Prof gave them a "A" on the paper. Anyone who questioned the use of this data was dismissed as a dunce and a trouble maker. I can ther the Prof saying, we don't consider 3 or sigma events in our modeling.

[oldlures1]

Mr. Tilson, you are obviously intelligent. Sadly though, many folks will read your entry as an accurate portrayal, not recognizing the half-truths and spin. I'll give you this, you are quite adept at using written word to further your "short" agenda.

[Tim Travis]

Squashnut wrote
"Fine article. Tim Travis notes that MBIA said in a May 12 conference call that they were not subject to any accelerated liabilities from GIC's. I guess he conveniently ignored the part about Friday's press release quoted above. Selective reading won't make you a profit. "

I'm not totally clear on what you are saying here so if I am missing something please let me know, but to avoid ambiguity MBIA has repeatedly said that they are not subject to accelerating liabilities from their financial guarantee business. On the conference call presentation they detail the ramifications of a downgrade on the GIC business which is what Mr. Tilson is referring to.
crashof2008
"Tim Travis makes a classic mistake above when he insists on continuing to rely on historical precedent to value these derivatives.”

To tell you the truth I do not feel competent at valuing those derivatives and I very much doubt that anybody else is either. The problem is that accounting rules require that MBIA and ABK mark their CDS exposure to market and the losses are not reflective of the actual expected performance of the contracts that they hold. The CDS positions that MBIA holds are not tradable securities and they often have significant protection on the actual portions that they insure. They are insurance contracts which they will hold and pay interest and principal on when they come due on defaulted contracts. They aren't going to sell them tomorrow to meet their tier one ratios like C or Mer might have to do so MTM accounting is not significant for MBIA. The relevant accounting format for the monolines due to the structure of the contracts would be to reserve against expected future losses as predicted by the performance and cash flow of the insured contracts, as opposed to the fickle predictions of future losses made by traders on the asset backed security indices. As more clarity comes into place in regards to the housing market I think it is very likely that you will see these indices undergo a significant re-pricing.

In the insurance business assumptions are made to estimate future claims and loss reserves and it is no perfect science. After a hurricane property and casualty insurers are very unlikely to be able to tell you with precision what their losses will be right after the event. Eventually as claims come in over time they get a more accurate picture which is why it is not uncommon to see drastic differences from estimated losses for insurance companies to actual losses. Berkshire Hathaway's annual reports are very candid about the subject.

There is no doubt that there are a lot of unknowns and uncertainties but if you look at MBIA's strong liquidity position, and extremely large claims paying ability I think it is very likely that the run off value of the company would be well above $20. If you look at the future premiums they will be collecting, in addition to their large investment portfolio, and the eventual reversal of a great deal of the MTM losses that MBIA's balance sheet and income statements have incurred, I believe an investment at these levels creates an excellent risk/reward opportunity for the long term investor.
(Disclosure Long MBIA, short puts on MBIA and ABK)

[Ishortyou]

you have also take into account that book remediation is a must, specially from 'toxic liabilities', but this of course takes time and patience, quarter by quarter.

[Ishortyou]

I am sure once their book value is sound a triple A reinstatement is to follow to rewrite fresh new low risk business insurance again.

[ACEMAN]

Y'all got that right, i.e., the "spiraling down" part as discussed by Barclays UK. However, it is not only MBIA that as guarantor will have to scramble to meet its obligations, it is the very large insurance companies that not only provide GICs but also the reinsurance to cover most life and annuity contracts. The fact is that there are credit derivatives and CDR markets that allows us to see immediately the impact of a change in ratings and the need to cover the premium increase needed to cover the real static liabilities. Just think of what might happen in the annuity and life insurance markets when policy owners get a wiff of GIC and credit derivative losses and increased premium. Barring full surender of policies, the insurance companies will need to extend contracts and reduce the pay-out to individual policy holders. This could be huge---and it did happen before during the Depression. In effect, it defines the question of risk.

[mythoughts]

I'm just glad I shorted MBI several months ago and have not sold out my triple digit gains yet because there is more to be made. All you long holders are losers now and will be more so next month. BEWARE!

[oldlures1]

Tim Travis - well done!

[crashof2008]

Tim Travis-

Let's be clear. What will unfold over the next few years during The Great Deleveraging is a Chernobyl that will adversely affect billions of innocents worldwide. They did nothing to deserve this.

This catastrophe is largely caused by two critical factors: 1) faulty models that claim stock and derivative prices will be distributed along a bell-shaped curve, rather than having fatter tails associated with a Cauchy distribution of prices and outcomes, coupled with 2) a reckless use of hyperleveraging that amplifies the effect of this deeply flawed price distribution assumption.

MBIA is a prime example of how profoundly bankrupt this lethal combination of false derivative modeling coupled with hyperleveraging can be.

You state that:

"The CDS positions that MBIA holds are not tradable securities and they often have significant protection on the actual portions that they insure. THEY ARE INSURANCE CONTRACTS WHICH THEY WILL HOLD AND PAY INTEREST AND PRINCIPAL ON WHEN THEY COME DUE ON DEFAULTED CONTRACTS." (emphasis added).

This is demonstrably false. If MBI were planning to hold this deeply toxic and radioactive waste to maturity, and pay any and all necessary claims as you so blandly assert, why are they (together with Ambac) so desperate to CANCEL 125 billion dollars worth of them as described just last week in the Financial Times at:

tinyurl.com/5ogde4

MBIA IS placing these on the market, in direct contradiction to your false assertion above. They are NOT holding them to maturity and they are proposing to NOT pay any interest and principal on defaults. And yet you oppose all rational market based accounting, hiding behind methods that conceal the objective reality on the ground.

You either believe in free markets or you don't.

Any attempt to avoid marking these securities to market by pretending that they will never be marketed in any stress scenario, smacks of a socialist lack of faith in the purgative powers of free market pricing.

[NOYBIZNIZ]

tinyurl.com/3wd282

[Tim Travis]

crashof2008 wrote
"This is demonstrably false. If MBI were planning to hold this deeply toxic and radioactive waste to maturity, and pay any and all necessary claims as you so blandly assert, why are they (together with Ambac) so desperate to CANCEL 125 billion dollars worth of them as described just last week in the Financial Times at:"

MBI and ABK are not the desperate ones in this situation. The banks and investment banks that have bought the insurance are the ones that are facing significant additional write downs as a result of the ratings downgrade. Since they are and should be relegated to MTM accounting to keep their Tier 1 capital ratios at acceptable levels, taking these write downs will likely lead to another round of capital raising.

The reason that the insurers might be willing to discuss remediating some of these contracts is quite obvious in that it does not make sense to have your largest customers be extremely unhappy with your product. If they can come to a reasonable compromise with some of the policyholders to help their customers in a way which does not hinder the insurer’s shareholders then these negotiations are quite logical in that if these companies intend to stay in the financial guarantee business, these relationships will be crucial to their future. These discussions would be directly related to the ratings agency downgrades which have no true economic effect on the insurer’s CDS portfolios, but will have significant effects on the policyholder’s positions. Therefore it is clearly in the policyholder’s interests to have these discussions much more than the insurers.

I don't even know if they are really having serious discussions or not and I'm not too concerned about rumors anyways but it does make sense for them to do everything in their power to assist their clients as long as it is fair to shareholders as well. Any future business prospects are up in the air and are not figured into my $20-$30 valuation of MBI but there are quite a few insurers who function quite well with ratings below AAA like AIG for instance. MBI has quite a bit of surplus cash with which to start new well capitalized subsidiaries so that is just a call option on the valuation, but I'd prefer to see an aggressive share buyback and perhaps a recapitalization of the debt structure if possible.

Also you might note that the CEO has bought $1,724,690 of stock in the last month, and much more before that so his interests seem to be very much aligned with shareholders for what that is worth.

[adan]

this is one very long, very complex, and even more interesting article!

throw in the back & forth comments, and, though i don't fully understand the pros/cons of the arguments, can see there's deep and important ramifications
involved

so for that, great article, thank you much :-)

[adan]

this is one very long, very complex, and even more interesting article!

throw in the back & forth comments, and, though i don't fully understand the pros/cons of the arguments, can see there's deep and important ramifications
involved

so for that, great article, thank you much :-)

[crashof2008]

Tim, I really must give you some credit, you have tried valiantly to defend a losing position. I respect that and your ability to change the subject is excellent.

In closing however, I must take final exception to this astonishing excerpt from your most recent post:

"...there are quite a few insurers who function quite well with ratings below AAA like AIG for instance."

Are you aware that the CEO of AIG, Mr. Sullivan, was forced out of office a little over a week ago after an emergency meeting of the Board of Directors?

This occurred after they lost 30 billion in 2 quarters based on precisely this reliance on bell-shaped distribution of pricing and behavioral outcomes, coupled with massive overleveraging that is forcing MBIA into bankruptcy before our eyes.

How you could describe such an outcome as "functioning quite well" is beyond me.

That historic debacle is outlined in the Financial Times at:

tinyurl.com/4d8s9u

A couple points to offer you:

1. You might enjoy and benefit from a subscription to the Financial Times of London, the world's finest newspaper.

2. You might also enjoy and benefit from my website listed with this post. I've reviewed hundreds of working papers of the Federal Reserve and have tried to concisely put forth some of these key issues in that venue.

Till our next debate.

Matt

[TomArmistead]

Tim Traivs, you do a good job making a factual case for MBI.

Whitney, MBIA has included information on the liquidity requirments for the asset management in their presentations for some time, most recently on the first quarter earnings conference call.

If you would bother to look at the 10-Q, you would see that the asset managment company has 10.412 of triple A available for sale and 4.279 of double A available for sale. These bonds are easily sold at fair prices, even in today's market.

You might also study the slide on the earnings call presentation - hard to miss, it's in twice - on the difference between book value and two nonGAAP metrics, adjusted book value (26.67 per share) and analytic adjusted book value (42.15 per share). The differences include the present value of future installments, as well as the gap between mark to market losses and management's loss estimates.

What is happening as MBIA is not writing new business is that their capital cushion is increasing. Moody's downgrade has effect of accelerating this process.

Market hysteria has created an amazing amount of mis-pricing on everything around this whole situation - CDS on MBI and ABK, the price of their stock, the market value of bonds they insure, the rate of interest on their debt, etc. Management of these companies knows what the proper values are, and in due course they will exploit the mis-pricing to create shareholder value.

[Ishortyou]

I agree this is an excellent opportunity to create book value, certainly a good time to delever from 'toxic liabilities' and keeping all the cash possible or impossible to exagerate, this will speed up the process of 'book remediation' to reinstate their triple A ratings again and start writing down new low risk business as usuall

[NOYBIZNIZ]

Go to tinyurl.com/3wd282 and search for "Tilson"

[fxtrader07]

I fully agree with Tim Travis. This is another - and rather deceptive - "i talk my book' article from Tilson. Looking at his article at SA I'd say 95% of them fall into this category - making either a long or short case for his various portfolio positions. However, it all doesn't add up!
first MBIA certainly was aware of the consequences that downgrade would have and they said it on their website. (indirectly, tilson even admits that when he disappointedly refers to the not downstreamed 900 million$)
Alas, it looks very much like all the hard pressing by Tilson and Ackman and all the crying foul rhetoric towards MBIA when they refused to downstream the 900 million was in fact in anticipation of th GIC-issue. They really had liked to force MBI to downstream the cash as to enhance the likelihood of a quick bankruptcy. That alone speaks volumes about the integrity and the moral standards of these 'investors' - and goes well beyond talking one's book. It's an outright, blatant attempt to talk a functioning company into bankruptcy by a wide use of media networks.
shame on you, mr tilson/ackman! You may tout yourself a 'value investor' but what 'values' do you actually stand for?
and then: you certainly didn't 'just now' discover the GIC isssue. Come on! Whom do you want to delude here? You were fully aware of it, all those months and you just utilize this 'sudden discovery' as a reason to write anothe bashing, negatice article on MBI, filled up with half-truths and very stretched interpretations.

[fxtrader07]

@crashof2008: you are a poor heavily biased guy who obviously goes to sleep every night hoping the world will have come to an end by the time he wakes up next morning. And over the course of the day you are seemingly obsessed to get all the bad news there is.
Enjoy the money you make that way while it lasts (if you make any money, that is) but to me this is a pretty miserable way of living. The money you make (if at all, longer term) is a lousy compensation for such a life full of negativity and friction.

[fxtrader07]

@NOYBIZNIZ: great link! thanks.

[oldlures1]

noybizniz - thanks for the link!

[oldlures1]

Here's a quote released today from MBIA's CFO, E. Edward "Chuck" Chaplin:

"Contrary to recent statements in the media, MBIA is not in a 'tenuous situation'. Our ability to quickly reposition the assets underlying our ALM business in a difficult market demonstrates the high quality and liquidity of the portfolio. The holders of our insurance policies, GICs, medium-term notes and other debt instruments can rest assured that MBIA will meet its obligations to them as it always has -- on time and in full."

Personally, I remain optimistic and supportive of MBIA. In fact, at this juncture, it has manifested into something more than an investment. To me, watching this saga unfold, it's the difference between right and wrong. And for clarification, MBIA is the former. When this all shakes out, I sincerely hope that MBIA is able to recover from this much-undeserved attack, and that the likes of Ackman, Tilson and others are spending some much-deserved time at Club Fed.

[fxtrader07]

the irony will be that ackman and tilson will soon have covered their shorts and even gone long the monoliners while perhaps still talking them down a bit. making money on the way down and up. after all, they certainly know where the truth in their talks and 'presentations' ends and the uhm,'errors' start...
and then i sometimes wonder what tilson actually gets his fat mgmt fees for - after all, he usually in 90% of the cases just piggybacks his buddy Ackman....

[oldlures1]

fx - You may be right, but do they ever go "long" on anything?! After all, it doesn't compliment their slash-n-trash tactics.

[TomArmistead]

Ackman's last published filing with the SEC showed a nominal short position in MBIA - at that point he was out of it. He still badmouths the company, when a chance comes up.

I agree with oldlures, this is turning into a morality play, a battle of right and wrong. It's too bad Ackman has covered his shorts, it would have been a joy to see him get caught in the coming squeeze.

A lot of the negative comments I see on MBIA sound like people who have been hypnotized into believing Ackman's nonsense, they will pay a large price for relying on his biased misinformation. They would do better to spend their time going over the financials and the presentations, doing their own thinking.

[Value Dope]

fxtrader - Whitney Tilson is a great marketer, he's proven if you say Buffett enough, u can find some value types of give you money. You are right about Tilson, he gets a lot of fund fees for doing no brainwork and just investing in the same ideas of his HBS buddies. The best thing is those mgmt fees are not needed, Whitney makes plenty organizing the pump and dump value conferences, peddling his newsletters, writing for the FT, media appearances. It's all about finding the sheep to invest though. Have you seen the fees for his mutual fund and the performance of that fund, wow, i think Renaissance's 44% incentive fee is a bargain compared to tilson's utual funds!