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Third Avenue sues MBIA

|Includes: MBIA Inc. (MBI)

Third Avenue, which holds a large amount of MBIA's surplus notes, has sued in Delaware Court, seeking to block the transformation or alternatively to have the surplus notes moved from MBIA (the SF subsidiary) to MBIA Illionois (to be renamed National Financial, the muni only subsidiary).  The papers are on MBIA's website: here is a link 

The surplus notes contain a clause prohibiting MBIA from transferring all or substantially all of its assets while the notes are outstanding. The suit primarily is concerned with enforcing this language, although it also alleges fraud in the usual way.  The word "all" is fairly strong: because MBIA still has substantial assets, the wording may not be sufficient to lead to recission of the transfer.

One concern this suit raises has to do with the deterioration of relationships between MBIA and Third Avenue, its second largest shareholder.  Marty Whitman has a history of avoiding harm from short-sellers: their main effect on his operation is to drive prices down to areas where he can buy at a profit.  It has been comforting to have his funds as a fellow shareholders, and it is uncomfortable to have them suing and asserting that MBIA (the SF subsidiary) is in danger of insolvency due to the toxic assets it insures. 

MBIA management had set a goal of April 1st to raise additional capital, presumably to further strengthen the muni only business.  That date has come and gone without any additional capital being raised. 

As a practical matter, the parties suing MBIA over the transformation, or in the case of 15 banks, complaining to Dinallo about the issue, would be better off to come forward with some capital to invest in the company. The amount required is trivial in proportion to the amount of debt or insured bonds that would be strengthened enough to trade at somewhere near what they are actually worth. However, litigatin seems to be the preferred answer.  

I reduced my exposure on the news, but I am still long.