MBIA Sues Countrywide: Part of the Solution to Clean Up the Lies 13 comments
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Yesterday MBIA (MBI) sued Countrywide, now part of Bank of America (BAC), alleging fraud, misrepresentation and breach of contract in connection with over 14 billion worth of MBS-containing Countrywide mortgages and insured by MBIA. MBIA has already incurred $459 million in losses. This is the beginning of what may be a long battle by the bond insurers MBIA and Ambac (ABK) to recover part of their losses from those responsible, a process they refer to as remediation.
Both companies have stated that they expect material/substantial recoveries due to misrepresentations and breaches of warranty with respect to securities that they have insured.
Ambac's Chief Risk Officer, David Wallis, on the second quarter earnings call, talked at some length about how bad some of collateral was – many of the loans involved are fraudulent based on mis-statements of income or occupancy. He also implied that some of those to whom these claims have been presented have been less than eager to resolve them. Nevertheless, Ambac took 263 million of credit on its income statement for expected remediation. The 2nd quarter 10-Q indicates ABK expects to recover from sponsors: i.e., investment banks.
Brown's position was that while MBIA has been diligently pursuing remediation and expects substantial recoveries, it is still too early to reflect them in the income statement. Noting that attempts to reach agreement with BAC have lead to litigation, it is understandable that he was unwilling to book recoveries in the face of determined opposition.
I spent some time looking at various financial statements for remediation possibilities after it came up during 1st quarter conference calls. For example, Countrywide (a large source of MBIA's business) had substantial sums on its books for warranty and representations liability. Bank of America, having acquired Countrywide, makes no mention of the sums involved.
Bear Stearns while they were in business acknowledged the existence of the concept, but had no experience from which to estimate losses and accordingly booked no liabilities. Bear Stearns subsidiary EMC, which specialized in buying and rehabilitating delinquent mortgages, was a frequent sponsor or seller of mortgages which were securitized and insured by Ambac. JP Morgan (JPM), having acquired Bear Stearns, doesn't mention warranties and representations liabilities on its latest 10-Q. I recall that right after the transaction Jamie Dimon seemed to be under the impression he was not acquiring the liabilities.
Merrill Lynch (MER), which acquired sub-prime mortgage company First Franklin from NCC (NCC), did show a liability on its 10-Q, fairly substantial, and named First Franklin as the source. One of Ambac's largest loss cases is First Franklin. Of course, Merrill Lynch has now been acquired by BAC, which has apparently been unwilling to resolve such issues, to judge by the fact that MBIA has resorted to litigation on the Countrywide business.
My opinion is that dishonesty was pervasive in the industry and very clear protective language was standard in the contracts involved. Accordingly, I would have expected remediation to be substantial for both companies, but now it seems that many of the responsible parties have been acquired by others who seem less than enthusiastic about accepting responsibility for misrepresentations and breach of warranty.
That brings me to a pet peeve – the use of the term "toxic waste" to describe mortgage assets. Home ownership is part of the American Dream and mortgages issued for that purpose are non-toxic. What is toxic is the witch's brew of lies by the mortgage applicants, brokers, appraisers, mortgage companies, investment banks, etc., creating an endless quagmire where no-one wants to take responsibility for his own actions.
MBIA's action in suing Countrywide is part of the solution, painful but necessary. Every fraudulent transaction needs to be pushed back along the chain of perpetrators to its original source, if that person or entity can be located. As much as possible, those whose dishonesty caused the losses must bear them.
I am long MBI and ABK and regard remediation as an important consideration in reducing losses. However, I expect that there will be considerable litigation and delay. Any benefit to the earnings of ABK and MBI may well be years in the future.
If the Paulson rescue plan is passed, I would advocate that any MBS acquired by the Treasury Dept. be reviewed for remediation. What is scaring buyers off is the "toxic" nature of the assets: in my opinion that is the dishonesty, and if that is properly dealt with, what remains will trade at a fair price, reflecting the fact that a majority of Americans are still working and still paying their bills.
Disclosure: Long MBI and ABK.
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This article has 13 comments:
All I ever hear about is how we need to get back at the CEO’s and policy makers who did this. Did what? Created one of the greatest housing and economic booms of the last 40 years. Sure there was excess, but there was also GREAT PROSPERITY. It only came apart when a couple of short sellers became desperate to cover and fabricated a strategy to destroy the monolines via their CDO participation. Yeah, they convinced everyone that the monolines’ CDO’s were worthless. Just great! Now those supposed worthless CDO’s are only just worth less, and vultures like Buffett with GS as broker are foaming at the mouth to buy them up.
Yeah, those shorts convinced everyone and along the way they convinced everyone EVERYTHING was worthless and destroyed the entire financial confidence and system.
Great job guys! Let’s put the blame for Cramer’s next depression where it belongs – right in the laps of a few narcissistic shorts.
Perfect Storm:
Mark to mark was inacted.
Up-tick Rule eliminated
Margins requirements decreased so it became like "Girls Gone Wild"
No SEC supervision
They were wrong in many instances and are seemingly not feeling any heat for their mistakes. Now they appear to have swung the other way to save face and our probably getting too negative. And yet the market still hangs on the word of these soothsayers as gospel.
If this gets legs, I think it could "right" a "wrong" and be a big benefit to the bond insurer's balance sheets and capitalization structures.
Mark-to-market has required them to write down assets to near zero without any regard for future income streams (premiums) generated by existing contracts. Those premium streams have been relatively unaffected by today's market turmoil, so the PV of those income streams should be relatively unaffected as well, yes? Unfortunately, no. They've had to book large write-downs (and obtain LOTS of additional capital as a result) to adhere to existing m-to-m standards...and adhere to the seemingly subjective demands of the rating agencies. Hopefully, this will right a wrong with regard to mark-to-market, and the bond insurers will find themselves not just "over-capitalized" but EXTREMELY over-capitalized. The spotlight will then turn to the rating agencies to see how they react - will they maintain their current positions? Last week, Moody's indicated it would be conducting follow-up reviews of the monolines over the coming weeks and implied that further downgrades were likely. We'll see.
apppro is right.
biz.yahoo.com/ap/08100...