Timothy Travis

MBIA's GIC Exposure Could Trigger a Liquidity Crisis

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)