Tom Armistead

Counterintuitive Accounting: Ambac Edition

The treatment of liabilities under mark to market, while logically consistent, results in absurd results. Mark to market advocates would do well to give that some thought, since it demonstrates the logical weakness of the current implementation of the concept.

Ambac is not trying to fool anybody, they are just keeping the books according to the rules.

texalope, there is a discussion of MBIA's accounting for litigation on the last conference call. Briefly their accounting is consistent with what others in the industry have done. Countrywide, while still operating under their own name, carried substantial warranties and representations liability reserves, which is the other side of MBIA's litigation. Bank of Americal doesn't disclose any information on the topic.

GAAP seems to be moving in the direction of severely limiting management's ability to present their best estimate of the financial position of the business. As a shareholder, that is the information I am most interested in. MBIA has consistently presented management's best estimate, in the form of aaadjusted book value, so from there it is a question of whether you trust management's judgment.

Monoline Mania: MBIA and Ambac Included in the Dash to Trash

jimmy,

I was wondering about that myself. MBIA has stated that it is corporate policy to sue anyone whose fraudulent actions have harmed their shareholders. They have not sued any rating agency, although they have been pretty thorough about suing the other parties responsible.

As far as I can see the players in the securitization game seem to have this belief that the normal rules about fraud and so on, even when supported by contractual clauses, just do not apply to their situation. It's like the whole area is supposed to be outside of the reach of established business and contract law.

I found that also going over the financial statements of some of the players, they were aware of warranties and representatons liability and would mention it in passing but setting up meaningful reserves and publishing them just doesn't seem to happen. The belief seems to be that it will just go away if they ignore it long enough.

Jay Brown said it could take 4 years for all of this to be resolved.

On another topic, MBIA made a list of the 20 most concentrated hedge fund holdings, a list that has outperformed the S&P by 14% a year since 2001, the article was here on S-A.

On Sep 04 03:32 PM jimmy46 wrote:

> Hello Tom
> Here's something in the news yesterday:
>
> ""Investors who believe that major credit-rating firms should be
> held responsible for their disastrously optimistic ratings of subprime-mortgage
> bonds have won at least an interim victory.
>
> U.S. District Judge in New York ruled late Wednesday that Moody’s
> Investors Service and Standard & Poor’s can’t invoke the 1st
> Amendment to hide from subprime-related legal challenges.""
>
>
> Is this ruling likely to have significant benefit for MBA,
> or do the rating agencies have 10 more lines of defense?

Monoline Mania: MBIA and Ambac Included in the Dash to Trash

What I did was sell enought of the September 7 calls to cover the cost of establishing that part of the position, 14 calls I sold out of 80 I owned. So I got to play the game next month on house money, try to trade my way to owning some free lottery tickets.


On Aug 28 03:02 PM alajac wrote:

> Hope you sold the open, Tom (though by option exp I think we'll be
> higher). I think we are (next) going to work down for a retest of
> some moving averages and then get one last big rally starting September
> option expirations week, pretty much just like in 1938. That should
> pretty much be "it" for the major upside for the next few years.

MBIA Reports a Profit: $1.1 Billion in Expected Recoveries on Claims

JPM is welcome to have an opinion, I dispute the ethics of doing a hatchet job on a firm that you are in litigation against without disclosing the source of bias. I reported them to the SEC, let them figure out if JPM did anything wrong.

Briefly I rely on company presentations for the timing of the cash flows on paying off the ABS CDO claims. Similarly I rely on company LAE estimates on RMBS. It is normal for these loss estimates to develop over time.

Where I think you are missing the point is asserting that "they will not survive to win lawsuits." The suits on the 2nd lien RMBS are very simple, MBIA has contractual rights due to warranties and representations and it intends to assert those rights. BAC is the prime offender but all of the big investment banks seem to believe that their contractual obligations can be disregarded if they become inconvenient. That's not how it works.

I notice you are operating under a newly minted screen name and are concerned only with MBIA. If you have as much detail to contriubte to this discussion as you claim I would suggest you register with Seeking Alpha under your real name and make you case in a full length article.


On Aug 13 10:37 AM MBIAisDEAD wrote:

> What specifically do you dispute from JPM?
>
> By the way I don't mean to be rude. Just trying to get a coherent
> long rationale.
>
> What do you expect losses on 2nd-lien RMBS to approximate? Do you
> give MBIA's LAE any credence? I wouldn't as they are essentially
> booking losses on a quarter-by-quarter basis.
>
> The realized losses on MBIA's multi-sector ABS CDO portfolio in excess
> of subordination will probably be > impairments by year end. Collateral
> losses will be catastrophic on the non UP only ABS CDOs.
>
> As BBB CMBS tranches begin to be torched, and the deductible on these
> deals (these are not TI&UP deals, once deductible is torched
> they are AC&amp;D) is exhausted we will see large cash outlays.<br/>
>
> Here is a good way to see:
>
> Look at the amortization of the ABS CDO portfolio over the last six
> months. Some deals have remained static, even though an EOD has been
> triggered and they are in rapid AM. The cash flow from subordinate
> tranches (which are now torched) has been diverted to senior classes,
> but soon cash flows will not even cover interest payments, let alone
> pay down principal.
>
> Then MBIA steps in on these ~$16 billion in ABS CDOs. While paying
> ~$600 mm per quarter on 2nd-liens.
>
> Also, notice the lack of comment on the Alt-A book? That was considered
> "adequately" protected in Q1? That is because it has been performing
> horrifically, with severities >55% and will incur significant losses
> going forward. Ambac has ~$1.8 billion in L/LAE on their (admittedly
> worse) Alt-A direct book. MBIA has zero.
>
> MBIA also has no reserves on CRE whatsoever.
>
> MBIA also has a gaping hole in it's ALM unit, not booked as a liability
> even though MBIA Insurance corp. Guarantees the sub's liaibilties.
>
>
> No one -- and I mean no one but management -- believes the company
> can pay claims. They will not survive to win lawsuits.

MBIA Reports a Profit: $1.1 Billion in Expected Recoveries on Claims

JPM is suing MBIA and their analyst did a hatchet job on the company to support their litigation. The report did not include a disclosure of the analyst's bias, a serious ethical lapse.

It should be further noted that JPM has a stake in taking the position that contractual rights afforded by warranties and representations are meaningless, because they bought Bear Stearns which had a huge exposure to claims of that type which was never reflected on the books. Ambac is suing over that.

Hence Daniels Kim's wretched hatchet job.


On Aug 12 04:08 PM MBIAisDEAD wrote:

> JPM Thinks ABV is -$40

MBIA Reports a Profit: $1.1 Billion in Expected Recoveries on Claims

Thanks for your support, I noticed in the option update Friday by Andrew Wilkinson there was a large play in January options, someone sold 10,000 puts at 5 and bought 18,000 calls at 10, so there are a few others who have similar ideas.

Tom


On Aug 07 05:26 PM jimmy46 wrote:

> Great analysis Tom,
> I've been long myself thinking along your lines.

MBIA and BofA: Thoughts on Litigation

I looked at your article, Part 1, paragraph 1 has several factual errors: 600M paid on second liens s/b 450M, 75% s/b 40%, 1.2B s/b 1.3B and there is no 600M of anticipated recoveries on servicer lawsuits anywhere in MBIA's reserves. They have not recognized any possible recoveries in their financial statements to date.

The allegations in MBIA's complaint against Merrill on the CDOs, if factual, demonstrate fraud. It is probably best for you and me to leave determination of that to the courts; although as a practical matter we have to form an impression when we make our investment decisions.

I personally am a big fan of Eric Dinallo and obviously don't support your views on what he has done as a regulator. Both the NYSID and MBIA used 3rd party consultants to look at the projected losses which are central to the issue. When the cases are resolved we will learn more.

I see you are short MBI: just a thought, but if I were you I would do it by options, buying puts, rather than shorting the stock.


On May 15 01:30 AM Mark Alexander wrote:

> MBIA shareholders would love to see BAC simply walk away from the
> deals causing such large losses. Unfortunately, this would be unrealistic
> even if MBIA were truly a naive victim. However, MBIA is a multi-billion
> dollar institution in the business of evaluating credit risk and
> there are billions of dollars at stake, so the chances of BAC leaving
> billions of dollars on the table are approximately 0.
>
> MBIA will almost definitely benefit from repurchases of loans that
> breach representations and warranties. But this won't happen simply
> because the loans are bad. There need to be clear (and probably very
> explicit) breaches.
>
> BAC (including Countrywide and Merrill) originated hundreds of billions
> of securitized loans, of which the MBIA deals make up a very small
> subset. The $360M in repurchased loans represents a drop in the bucket.
> (As an aside, I do not think that the $760M mentioned in BAC’s financials
> relate to amounts that MBIA is claiming.)
>
> The quality of most of the other Countrywide securitizations was
> comparable or worse than the MBIA deals. So if a court determined
> that Countrywide needed to repurchase a high percentage of the securitized
> loans, BAC would probably let Countrywide go under and walk away.
>
>
> MBIA is suing Merrill over CDOs, which involve a portfolio of securities,
> not loans. This suit is built on a false foundation – that Merrill’s
> special knowledge from detailed loan level analysis afforded an unfair
> advantage. About 18 months after the first Merrill deal (Broderick
> 2, possibly the worst of these CDOs), MBIA publicly stated that a
> very detailed loan level analysis had been performed and concluded
> that no impairments were likely on these deals.
>
> As for your comments about ABV, this metric more or less takes all
> of the financial resources available to pay claims and subtracts
> known losses and other liabilities. It ignores exposures for which
> no liabilities have been established (around $700B for MBIA). If
> the value of these exposures were 0, financial guarantors would not
> need to charge for their product.
>
> Because of this, financial guarantors should trade at a significant
> discount to ABV unless their franchises are extremely strong. MBIA
> is tainted by an onslaught of lawsuits, and its business is at best
> in hibernation, and quite possibly dead. Therefore, even if MBIA’s
> known loss estimates are OK, MBIA should trade at a very steep discount
> to ABV, so the upside for MBIA is more like $10 or so for the foreseeable
> future (not $37.61).
>
> Making matters worse, there is a developing consensus among external
> analysts that MBIA is grossly understating its liabilities (by an
> amount that could easily exceed $37.61 per share). Do you really
> believe MBIA's liabilities are OK? Does it make sense to you that
> MBIA has a reserve equal to one quarter's worth of payments on second
> lien securitizations?
>
> If you find time, I would encourage you to look at the points outlined
> in my Seeking Alpha post from two nights ago (MBIA: A Low Down Dirty
> Shame). I would prefer to realize I am wrong, and that MBIA really
> is a good investment and a good company overseen by good regulators.

MBIA and BofA: Thoughts on Litigation

toomuchgas, the cerdit ratings agencies have grossly over-compensated for their original mistakes in rating so much toxic waste as tripe A.

So, they reduce the ratings on MBIA Ins Corp, changing the stress tests every month, increasing the stress case by arbitrary and capricious assumptions, basically as a CYA maneuver.

When this is over MBIA will have more credibility that Moody's, S&P and Fitch combined.

MBIA and BofA: Thoughts on Litigation

dok tari and Gtarras,

Reason to be long, nonGAAP metric adjusted book value stands at 37.61, and does not include any possible recoveries from litigation. In the past MBIA traded at roughly 1X this metric, so a successful resumption of writing municiapl bonds and a resolution of the questions about the cost of their CDO liabilities could entail a recovery to that area.

There are a lot of uncertainties but it's a 6 bagger if it works out, from 5.90 as I type this.

I have a negative reaction to BAC due to the situations noted in the article, whether they can create value from what they bought is not something I want to guess at, hence neither long nor short.

One Easy CDS Fix

At one time state "bucket shop" laws, in particular NY State's General Business Law Section 351, prohibited gambling transactions in the equity markets. Your Congress saw fit to specically exempt CDS from these types of legislation, with the results we have seen. Write your congressman.




On Mar 30 03:40 PM Poor Dude wrote:

> Maybe we just need to outlaw all derivatives period? And most certainly,
> all naked ones or third-party ones where anyone other than a party
> with direct exposure is allowed to participate (and where anyone
> WITH direct exposure is allowed to participate only to their limit
> of exposure). Buying insurance on an asset or hedging a future liability
> is one thing. But placing bets on the future value of something you
> don't own is just gambling anyways, and really has nothing to do
> with investing.
>
> And I'm no lawyer, but I thought gambling was already illegal in
> most places and that any contract based on (or requiring) illegal
> conduct was automatically null and void by operation of law. Am I
> wrong?

One Easy CDS Fix

You're missing the point on the monolines: the provided credit insurance in two froms, traditional insurance policies and CDS.

Unfortunately the effects of mark to market accounting, which was not in place when the CDS were written, creates grotesque distortions on their financial statements, which have been further twisted by the negative hype from the short and distort crew.

Both Liddy and the OTS testified earlier this month that the assets insured by AIG's CDS on super senior CDOs were performing 100% through that date.

Translating their CDS into synthetic bonds is exactly the solution that was imposed on AIG - the insured bonds were bought and placed in the Maiden Lane facility.

The only fix for the CDS problem is to regulate them as insurance, with a requirement of insurable interest on the part of the buyer and adequate capitaql on the part of the seller.

The fix for the synthetic bond problem is to outlaw the practice because it puts the investor into the insurance business. Amazingly, there were synthetic bonds registered with the Irish Financial Regulatroy Authority, linked to the credit of the Icelandic banks, weeks before they failed. That is the klind of cynical fraudulent behavior created by the synthetic bond business.

AIG Bailout Empowers Class Action Lawsuit Against MBIA

Agree, MBIA does not insure the value of the bonds it wraps, its obligation is limited to paying interest and principal when due. That is where AIG got into trouble, they had to post collateral, so in effect they were guaranteeing the value every day.

Ben Graham Had It Right

Graham was talking about the question of whether defaults on bonds are an insurable risk, saying the answer is no because the losses have a tendancy to all occur at the same time, such as during a recession or depression. Losses on life or property insurance are usually randomly distributed over time.

However, if the losses on bonds are defined as principal and interest when due, payments can be spread over time, greatly improving the odds of making the risk insurable.

From there, it gets to be a question of raising capital or writing new business at a profit in order to be able to pay the losses.

Obama and Bush: Different Objectives, Same Results

I thought I heard Geithner draw a line in the sand when he pegged the conversion for future TARP preferred to the 20 day share price average as of 2/9/09.

Another Way of Looking at Risk in Financials

texalope,

There was Warren's letter and in the WSJ I think the same day there was a discussion of pension accounting for municipalities, the pension bonds, something I was not aware of, the practice of borrowing money in order to invest it in the pension funds.

My impression, based on my observations of municipalities around where I live, is that town pensions are pretty generous and for example the police or fire departments usually give those approaching retirement a promotion and a raise so their last year sets them up for good payments. Accounting for pensions has always relied to some extent on averaging values over the years because the equity markets go up and down. I studied it some in college although the rules have changed since then. Add to that the politics, elected officials don't have to answer when pensions go bad 20 or 30 years after the deals are made, and the result could be similar to what is happening to corporations about their "legacy" obligations.

I agree that there will be problems, but expect that they will be manageable. The private sector has converted to 401ks and the public sector will do likewise, with older employees grandfathered on their pensions, or defined benefit plans capped as of a certain year, so on and so forth. With stocks down as bad as they are many plans will be underfunded with protracted games of political football. Eventually taxpayers are on the hook for it, the result will be property taxes at the local level, pushing down property values. In effect, the town retirees own part of everybody's house. At the state level it will be income taxes, fees, sales taxes, etc., with more political football. The taxpayers will take the view that private sector has to make do with 401ks so the public sector can do the same.

Just a year or so ago everybody was complaining there were so few losses on municipal bonds that the insurance was a rip-off, California was among the examples cited. There will be losses paid, probably enought to create demand for the insurance and support premium levels, not enough to endanger MBIA's muni operation.