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MBI - MBIA Inc.

valuecfa

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muscleman Newbie

muscleman

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Even at 1 billion the company is undervalued if the split is eventually  finalized. Heads u win tails u win more.

 

The loan from national to MBIA Corp is over 1.6 bn. Is that a loan above any other liabilities? If yes, then it is almost certain to be able to recovery 100% of the loan, so the company is undervalued indeed.

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valuecfa Newbie

valuecfa

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Even at 1 billion the company is undervalued if the split is eventually  finalized. Heads u win tails u win more.

 

The loan from national to MBIA Corp is over 1.6 bn. Is that a loan above any other liabilities? If yes, then it is almost certain to be able to recovery 100% of the loan, so the company is undervalued indeed.

 

I was factoring in a 37% writedown on the loan, on a $1 billion payment.

 

Yes. The National loan is secured, but in a rehab such as this that may occur it is hard to predict. This exact question was briefly discussed in the most recent conference call.

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"Cardboard, I started investing not as far back as the good old days of that short seller attack on Fairfax. So at that time, there were also a lot of short sellers trying to spread rumors on FFH, and NY post just report them at face value?"

 

You will have to come to your own conclusion, but whenever I see something in the Post with "unnamed" sources then I wonder if there is not some motive behind the article. A source to them appears to not mean the same as for the Wall Street Journal or the New York Times.

 

Type NY Post in Google. The first result of the search is the NY Post webpage. And what does it says? New York Post - New York News/Gossip/Sports/Entertainment. Does that fit with a serious article about a boring financial company such as MBIA that insures municipal bonds and other securities?

 

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The analyst is right. This is mind boggling that Moynihan and company keep on sending huge piles of money to lawyers in what is obviously by now a lost cause. They have lost every, I repeat, every case in court.

 

On top of losing the court proceedings, they are now on track to lose whatever recovery they could get on their own insurance contracts with MBIA once it is seized by regulators. I keep on saying that financially this is a wash for BAC. Pay the f**% $3 billion in put back to MBIA, then get back most of it via a solid recovery on your insurance contracts. Pretty simple isn't? No, instead we keep on paying ultra expensive lawyers which delays a BAC earnings recovery and we always have over our head uncertainty and likely more ammo for other cases if MBIA is successful with Bransteen.

 

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muscleman Newbie

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Very good letter!  Cheers!

 

Are you in MBIA too? :D

 

No...too much business risk.  But it is one that I follow like Fortress Paper...same reasons.  Cheers!

 

I didn't follow Fortress Paper, so I am not sure. What reasons are you talking about? Is it because you have a position in BAC?

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valuecfa Newbie

valuecfa

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I see that Bruce had 26% into MBIA in his Fairholme Allocation fund. Did he say he would like to buy more but couldn't?

I am curious how much you put into it? Is it convenient to disclose?

 

I don't recall Berkowitz ever saying that about MBIA.

 

A lot.

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Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

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He said he would like to buy more BAC in his interview, but didn't mention MBIA:  http://www.fairholmefunds.com/show_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/Bloomberg%20Transcript%20%28Distributor%20Edits%29.pdf

 

Erik Schatzker: Would you want to own more Bank of America if you could?

Bruce Berkowitz: Yes.

 

 

I see that Bruce had 26% into MBIA in his Fairholme Allocation fund. Did he say he would like to buy more but couldn't?

I am curious how much you put into it? Is it convenient to disclose?

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valuecfa Newbie

valuecfa

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If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Sorry, I didn't mean to imply that a loan write down would occur with ins. dept. intervention on mbia corp. I meant that a loan write down would occur if MBIA agreed to a $1 billion settlement, as was suggested in the above article as BAC's proposition currently in the negotiations.

 

Even if/after the Ins Dept. steps in , MBIA can still pursue its putback claims, which is (along with some other assets) largely what is securitizing the National loan. I don't think a write down would occur soley on the basis of the ins dept. intervention.

 

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My apologies, apparently it was me who misunderstood.

 

In either event, pursing my "worst case" train of thinking, let's assume that Corp. goes into receivership with a value of zero, a not improbable event at this point.  We can certainly walk several decision paths that might suggest that it's in BAC's best interests to settle (e.g. not hurting the Article 77 case, they'll really just be funnelling money directly back to Merrill, etc.).  However, it's also plausible, especially given that BACs claims may be junior to other policyholders and the secured loan, that they don't settle and write down their CMBS losses.

 

In this worst case scenario (plus a loss in the fraudulent conveyance case), I would say you could be looking at following:

 

1.  Complete writedown of the secured loan from National + $390 million more.

2.  MBIA Corp. would need to seek litigation financing to continue its defense/offense, which could possibly be on very unfavorable terms.  I understand that the deep pockets of Berkowitz or Warburg Pincus could mitigate this somewhat.

 

There's some super legal analysis on MBIA (Frankel, Herzeca, etc.), but further to the goal of figuring out how we don't lose money first, I don't think handicapping legal decisions is the best way to go about doing this. (and I'm not suggesting you are valuecfa, I'm partially dialoguing with myself)

 

So, equity would fall $2.09 billion to about $1.875 billion.  Unearned revenues of $1.9 billion would move into equity over the life of the policies (just under 10 years left, I believe).  So, total claims paying resources of $3.775 billion over their existing loss reserves.

 

National has $530.9 billion of insurance in force with $153 million in loss reserves.  The roughly 40 year average default rate on investment grade munis was 0.07%.  I'm a bearish sort of personality (which should immediately be evident), I would say the default rate looks higher over the next little while than lower, but even continuing the average, they are minimally underreserved by about $225 million (not all of the $530.9 billion are investment grade munis).

 

So, it seems to me that a not-beans-and-bunker worst case scenario gives you a return of $3.55 billion with an investment of $1.73 billion (I paid slightly under $9/share) over 10 years.  Aproximately 7.45% pa. with a complete wind down of operations, not to mention operational costs, which I didn't include.

 

I think I've reaffirmed that it's hard to lose money here, though locking in a large amount of money at single-digit percentage wouldn't have me doing backflips.  The asymmetry of the bet is what's interesting.

 

 

 

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Sorry, I didn't mean to imply that a loan write down would occur with ins. dept. intervention on mbia corp. I meant that a loan write down would occur if MBIA agreed to a $1 billion settlement, as was suggested in the above article as BAC's proposition currently in the negotiations.

 

Even if/after the Ins Dept. steps in , MBIA can still pursue its putback claims, which is (along with some other assets) largely what is securitizing the National loan. I don't think a write down would occur soley on the basis of the ins dept. intervention.

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btw...this analysis, of course, works against evaluating an investment in National directly, but we're investing in MBIA Inc., so it's incomplete.  If you move up to parent balance sheet and still assume a run-off, this lops even more from the downside return, but still no permanent loss of capital as far as I can see.

 

My apologies, apparently it was me who misunderstood.

 

In either event, pursing my "worst case" train of thinking, let's assume that Corp. goes into receivership with a value of zero, a not improbable event at this point.  We can certainly walk several decision paths that might suggest that it's in BAC's best interests to settle (e.g. not hurting the Article 77 case, they'll really just be funnelling money directly back to Merrill, etc.).  However, it's also plausible, especially given that BACs claims may be junior to other policyholders and the secured loan, that they don't settle and write down their CMBS losses.

 

In this worst case scenario (plus a loss in the fraudulent conveyance case), I would say you could be looking at following:

 

1.  Complete writedown of the secured loan from National + $390 million more.

2.  MBIA Corp. would need to seek litigation financing to continue its defense/offense, which could possibly be on very unfavorable terms.  I understand that the deep pockets of Berkowitz or Warburg Pincus could mitigate this somewhat.

 

There's some super legal analysis on MBIA (Frankel, Herzeca, etc.), but further to the goal of figuring out how we don't lose money first, I don't think handicapping legal decisions is the best way to go about doing this. (and I'm not suggesting you are valuecfa, I'm partially dialoguing with myself)

 

So, equity would fall $2.09 billion to about $1.875 billion.  Unearned revenues of $1.9 billion would move into equity over the life of the policies (just under 10 years left, I believe).  So, total claims paying resources of $3.775 billion over their existing loss reserves.

 

National has $530.9 billion of insurance in force with $153 million in loss reserves.  The roughly 40 year average default rate on investment grade munis was 0.07%.  I'm a bearish sort of personality (which should immediately be evident), I would say the default rate looks higher over the next little while than lower, but even continuing the average, they are minimally underreserved by about $225 million (not all of the $530.9 billion are investment grade munis).

 

So, it seems to me that a not-beans-and-bunker worst case scenario gives you a return of $3.55 billion with an investment of $1.73 billion (I paid slightly under $9/share) over 10 years.  Aproximately 7.45% pa. with a complete wind down of operations, not to mention operational costs, which I didn't include.

 

I think I've reaffirmed that it's hard to lose money here, though locking in a large amount of money at single-digit percentage wouldn't have me doing backflips.  The asymmetry of the bet is what's interesting.

 

 

 

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Sorry, I didn't mean to imply that a loan write down would occur with ins. dept. intervention on mbia corp. I meant that a loan write down would occur if MBIA agreed to a $1 billion settlement, as was suggested in the above article as BAC's proposition currently in the negotiations.

 

Even if/after the Ins Dept. steps in , MBIA can still pursue its putback claims, which is (along with some other assets) largely what is securitizing the National loan. I don't think a write down would occur soley on the basis of the ins dept. intervention.

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muscleman Newbie

muscleman

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Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

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Not at all, you can follow these specific proceedings at:

 

http://www.mbia.com/investor/legal_proceedings_ABNvMBIA.html#ABNvMBIA

 

Similar to the Article 78 case, the only news is all the plaintiffs dropping out except BAC and SG.  I've seen practically no discussion of it anywhere in terms of speculation, a bit surprising given its potential impact.

 

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

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