MBI - MBIA Inc.

[west]

You're right, PlanMaestro.  I'm still new to investing and I think my biggest weakness is getting excited about an idea and then failing to do full due diligence.  I've been very lucky so far, so my excitement is feeds on itself.  I'm trying to get better :).

 

merkhet, thanks for the analysis.  I'm just starting to learn about law, mostly for this investment, so I really appreciate the breakdown of your thoughts.

 

[merkhet]

 

That's a sample size of 1, so yes proof is very awkward because you haven't demonstrated whether the failure is caused by the gas canister or the design of the gizmo itself that is faulty.

 

 

That's the point tough -- the court is saying that you needn't demonstrate whether the failure is caused by the gas canister or the design of the gizmo itself.  All you have to do is show that the gas canister has hurt you in some way -- shrapnel perhaps.

 

In the MBIA case, I think it means that MBIA no longer has to show whether the real estate meltdown or the material misrepresentations caused them to have to pay out -- all they have to show is that the material misrepresentations caused them damage (i.e. - perhaps by showing that the damage on mortgage bonds without misrepresentation vs. mortgage bonds with misrepresentation averaged out to be a delta of $X, which would be your damages)

 

I disagree with Countrywide's assertion that it would necessarily be a hard task -- BAC should really settle and get this behind them already...

 

No problem, west -- every now and then I like to dust off the law degree and remind myself of my misspent youth...

[PlanMaestro]

I'm still new to investing and I think my biggest weakness is getting excited about an idea and then failing to do full due diligence.  I've been very lucky so far, so my excitement is feeds on itself.  I'm trying to get better :).

 

Hey West, I did not know much what was happening either. hehehe

[Cardboard]

Hi guys,

 

I have been reading through the MBIA thread and I am trying to better understand the thesis.

 

What is going to make GAAP book value eventually converge to adjusted book value?

 

Are the various settlements with financial institutions or commutations additive at all to adjusted book value?

 

What is the plan after all these deals? Return to the original business or liquidation? In other words, what is the process to make the shares trade at least to adjusted book value?

 

Thanks

Cardboard

[shalab]

My guess is that the lawsuits will take longer than expected to resolve - especially the countrywide one. If the lawsuits resolve, the stock should jump up but may not hit the book value. If MBI writes new business again, we will see the stock close to book value or above it.

 

 

[ERICOPOLY]

The discount rate to achieve the adjusted book value was in the 5% range.  I therefore don't think the stock should be trading up that high as investors should be wanting more return than 5%. 

 

Am I looking at this the wrong way?

 

Also note the price performance of AGO since they got their settlement.  They are not anywhere close to their adjusted book.

 

[ERICOPOLY]

Wasn't the adjusted book for MBI somewhere in the $35 range per last year's annual report? AGO is going for half book as there are still losses to be paid out.

 

The stock should be priced based on a multiple of earnings though.  I would think that instead of looking at adjusted book one should instead just be looking at earnings power and figuring out a multiple that seems appropriate.

 

You could apply a 4% discount rate instead of 5.x% and get an even higher adjusted book.  Doesn't mean squat -> as an investor you care what your earnings are relative to the price you pay.

[ERICOPOLY]

BTW, my positions in AGO and MBI these days are downside only -- I sold puts and used the proceeds to purchase BAC calls when BAC was in the low $5 range.  I just see much higher upside in BAC. 

 

A kamikaze strategy would be to go 100% BAC long with 100% BAC downsize risk.  My BAC strategy is more like an unpiloted predator drone rather than a kamikaze.

[shalab]

Fair enough - one should look at earning power. I still don't understand the 5% or 4% discount rate to achieve book - what time frame are we looking at?

 

[ERICOPOLY]

I'm not sure about timeframe -- anyhow it just looks to me like adjusted book value is academic in nature, however it appears to offer management's view of earnings power if you think of that discount rate in terms of a yield on adjusted book value.

[shalab]

How did you calculate yield -  earning/bookvalue (?)

[ERICOPOLY]

How did you calculate yield -  earning/bookvalue (?)

 

I read all of the MBI transcripts from conference calls, and letters to shareholders.

 

Somewhere in there I remember reading that they use 5.X% to calculate their adjusted book value -- it's a net present value thing.

 

I believe for example that you would have $2.20 in earnings if you had ABV of $40 calculated with 5.5% discount rate.  Now if the market priced your stock at 10x earnings you would trade at $22, which is a huge discount to ABV of $40.

 

I could be completely wrong -- I encourage anyone to tear me up if so because otherwise I don't learn anything.

[ERICOPOLY]

BNP settles in the restructuring case (In other words, more commutations and the European bank needed the liquidity):

 

http://www.ft.com/intl/cms/s/0/230fe70c-3ba7-11e1-a09a-00144feabdc0.html#axzz1j5de6qJv

 

[Cardboard]

The stock is down a fair bit lately and today's action just adds to it. Is the disappointment mainly about the delay in the article 78 trial which was scheduled for late February/early March and now sometime in the 2nd quarter?

 

I am also wondering about BAC. They seem really stubborn to settle vs other banks. They are also playing hardball with Fannie Mae now. I am wondering if they are not seriously considering to put Countrywide into bankruptcy and to just walk away.

 

I am considering to add to my position, but looking for feedback on what is the absolute downside if Countrywide is put into bankruptcy and cannot honor its mortgage put backs and they lose the article 78 trial?

 

Cardboard

[PlanMaestro]

How are you guys handicapping the liquidity issues that MBIA needs to navigate before it gets its deserved legal payoff?

 

Now moving away from the income statement, I'd like to make some comments about liquidity and capital, for which I have no slides. First, for MBIA Corp. It had $534 million of cash and highly liquid assets on its balance sheet at year end 2011, down from $1.2 billion at year end 2010. We believe that this amount is adequate against its expected needs and provides a reasonable cushion against stress on RMBS claims payments. However, as I mentioned, we do want to do additional commutations to fully deliver MBIA Corp. to more stable operations sooner.

 

In the fourth quarter, a portion of the payments for commutations we achieve were funded by borrowing from National under a secured lending arrangement approved by the New York Department of Financial Services. In order to engage in future commutations, MBIA Corp. will need to collect on its putback receivables or borrow additionally. It bears repeating that the need for liquidity from outside of MBIA Corp. is driven by the failure of a small handful of mortgage originators to honor their contracts that call for repurchase or replacement of ineligible mortgage loans in securitizations that we insured. As they meet or are required to meet these commitments, MBIA Corp.'s liquidity will be significantly enhanced.

 

National has liquidity capacity. Its balance sheet contained over $4 billion of invested assets as of December 31, 2011, as well as its $1.13 billion secured loan to MBIA Corp., and very little is expected in terms of near-term claim payments on its policies. Over time, we expect that both of our insurance companies will have adequate liquidity and earnings to provide dividends to the holding company. However, in the near term, we have agreed with our regulator that neither will pay dividends to MBIA Inc. without the Department of Financial Service's prior written approval. In National's case, that agreement expires in July 2013.

 

Now at MBIA Inc., our holding company, we have 2 main activities. One, the normal holding company activities associated with owning, operating subsidiarities and an investment portfolio, including tax planning, facilitating capital and liquidity movement, et cetera; and 2, managing the ALM portfolio, which is the bulk of our wind-down operations. The holding company activities had $226 million of cash and highly liquid assets at year end 2011 compared with $295 million at year end 2010. This cash, plus investment income and assets to be released annually from the tax escrow account, more than adequately provide for the debt service and operating expenses of this part of MBIA Inc. for the foreseeable future.

 

Now while we've managed the ALM portfolio as a stand-alone business, from a legal entity perspective, it's part of the holding company. That portfolio had $160 million of free cash at year end 2011, down from $239 million at year end 2010. Reduction was driven by 2 main factors. First, ALM made $675 million of principal payments in 2011 on its intercompany secured loan from MBIA Corp., as well as over $500 million in principal payments on GICs and MTNs. Second, ALM is exposed to liquidity demands when the value of assets pledged under affiliate and third-party collateral facilities fall as a result of spread widening. In the third quarter of 2011, market spreads widen significantly, reducing ALM's free cash balances. We have begun selling assets into 2012's somewhat more robust market to help mitigate this risk, and we're developing other contingency plans against this spread shock event.

 

So bottom line, the firm has used some of its liquidity flexibility to retire potentially volatile liabilities and has a lower risk profile as a result. The combination of the lower potential volatility and the near-term prospects for clearing significant litigation from our agenda are significant positives that will help us get to more stable operations in the future.

[alertmeipp]

http://seekingalpha.com/article/404951-mbia-s-ceo-discusses-q4-2011-results-earnings-call-transcript?part=qanda

 

Question-and-Answer Session

 

Operator

 

[Operator Instructions] Our first call comes from the line of Arun Kumar with JPMorgan.

 

Arun N. Kumar - JP Morgan Chase & Co, Research Division

 

Chuck, a couple of questions for you. One is the most recent topic you mentioned, liquidity. If you look at MBIA Insurance Corp. in your supplement, you have about $1.3 billion of cash to down from $2.3 billion a year ago. And in the 10-K, this time you made a lot of not all that cryptic comments about liquidity being impaired presuming if you do not collect on your putbacks. Now at what point do you run out of resources to commute any more transactions, be it CMBS or RMBS, any other type of transaction? And given all the comments that you made, what is the level of discussion that you're having with all these banks that you mentioned earlier in terms of getting to a resolution of this?

 

C. Edward Chaplin

 

Okay. There's a couple of questions embedded in that. First, we do not believe that the liquidity position of MBIA Corp. is impaired. We had adequate liquidity against all of the near-term obligations that the company has, and we believe that we have an adequate cushion against stress. I made the point earlier that most of the payments that we're making are better regular claims payments are around RMBS, and those payments have become somewhat more predictable over time as we went through the slides a few minutes ago. So we have -- we think a pretty good view of what the cash payments will be in the near-term. Now commutation payments are elective, and I've made the point before that we do not intend to commute ourselves into a liquidity impairment situation. That is the driver behind the intercompany loan that was put in place in the fourth quarter. The reason for the intercompany loan is that we do have this very substantial putback receivable on the balance sheet, which will be collected, but we're fixing the timing mismatch between the commutation opportunity and the availability of that putback receivable via this loan. So again, to the extent of we engage in additional material commutation activity, we will need to either collect on some or all of the putback receivable or engage in additional borrowing.

 

Joseph W. Brown

 

In terms of the conversations, we continue to have conversations with most of our counterparties. As you know, from what's been publicly filed, right now we're scheduled, if a trial is necessary, to go to court in the second quarter. We, obviously, would like to see a settlement with each of the counterparties before entering into that final phase, but there's no guarantees that, that will occur before that time.

 

Arun N. Kumar - JP Morgan Chase & Co, Research Division

 

Just another couple of quick questions on this. In terms of the intercompany loan between MBIA Insurance Corp. and the whole cost/ALM business, what amount was repaid in the most recent quarter?

 

C. Edward Chaplin

 

The balance as of Q4 is $300 million, and we made a $300 million, approximately, principal payment around the beginning of the fourth quarter. So the balance over the course of 2011 went from $975 million down to $300 million. So I know that in total we paid $675 million.

 

Arun N. Kumar - JP Morgan Chase & Co, Research Division

 

Okay. Lastly, in terms of the surplus notes and the drain has been causing on your Op co's resources, the $140 million or so in terms of annual debt service, has any discussion with the regulators in terms of preserving the capital of the Op co at this point, given all the payments that you have been making to commutations and otherwise?

 

C. Edward Chaplin

 

I guess we would all agree that the surplus note is really, really expensive, and it has a call date coming up in 2013 and we need to think about how exactly we're going to take it out and/or refinance it at that time, so that we get a more normal cost of capital. However, we did make a payment on the surplus note in January of 2012. Each payment is subject to the approval of the Department of Financial Services, so it's not really within our -- it's their decision each semiannual period, not ours. And they continue to approve those payments, going off the words in their mouths, but they would need to be comfortable with the capital liquidity position of the company at each semiannual period in which they approve those payments. And given its capital adequacy and its liquidity, there was no reason not to approve in this most recent period.

[valuecfa]

Anyone else still invested in MBIA? The settlements are taking much longer than anticipated.

[shalab]

Anyone else still invested in MBIA?

 

I am still on - the catalyst for me is when MBI can write new business which I think they will. Not very impressed with management, very subdued letter this year compared to last but I think this will work out.

 

 

[goldfinger]

I am still in. I followed Alison Frankel and C Herzeca on twitter (herzeca seems to be an expert in those types of cases) and they were talking about a higher probability of having a settlement in the april/may/june time frame.

[goldfinger]

Berkowitz said that he expected it would take the entire year for the fog to clear and MBIA to resume business in a recent interview. Let's be patient, if they resume business this stock is rocketing higher.

[valuecfa]

Isaac, at SubprimeShakeout, made the following point:

MBIA, on the other hand, states in its Reply Memorandum that it still seeks documents relating to the whistleblowers, the Fraud Hotline, Countrywide’s alleged “fraud cover-up,” and other internal fraud investigations, even if they don’t deal specifically with the loans in the securitizations at issue in the lawsuit.

 

Many of the requests identified by MBIA appear reasonable, and given Judge Bransten’s growing impatience with the speed of discovery (she’s already granted other MBIA motions to compel and castigated Countrywide for heel dragging in discovery), it’s likely that the defendants will be compelled to produce additional documents relating to loan origination fraud and their knowledge thereof.  Such documents would provide MBIA with significant litigation leverage, as they would support MBIA’s own claims of fraud, which carry the threat of punitive damages.

 

Even more significant from a leverage standpoint, once these documents are produced and cited as evidence in summary judgment or at trial, other existing or potential litigants could use them against Countrywide/BofA to prove their own claims of fraud.  Already, the mere fact that the existence of the FACTS database and an internal Fraud Hotline at Countrywide have been disclosed will provide litigants with a road map to obtaining those documents through their own discovery processes.  Should the contents of those databases prove dangerous enough, they may force BofA to settle the case rather than opening the lid on Pandora’s box any further.

[jlcawood]

MBIA Misled N.Y. Regulator on Restructuring, Banks Say

 

MBIA Inc. (MBI) misled the New York insurance regulator and concealed information when it sought approval for its 2009 restructuring, banks suing the company said.

 

MBIA didn’t tell the New York insurance department about a 2008 Lehman Brothers study paid for by MBIA that analyzed expected losses tied to mortgage debt and indicated MBIA Insurance Corp. was insolvent, the plaintiffs said in court papers filed today and dated March 16.

 

The financial institutions challenging the restructuring said that by concealing the study, MBIA misled state officials who went on to approve the insurer’s split. The approval allowed the company to move its guarantees on state and municipal bonds out of the unit that insured some of Wall Street’s riskiest mortgage debt.

 

“The information MBIA provided to the NYID was riddled with misinformation and half-truths,” the banks said in court papers. The filing was made by Bank of America Corp. (BAC), Natixis (KN), and Societe Generale SA. (GLE)

 

MBIA and Eric Dinallo, the state insurance superintendent at the time, were sued over the restructuring by institutions that bought financial guarantee policies issued by MBIA Insurance. They said the split left MBIA Insurance insolvent and harmed policyholders. Many of the plaintiffs have withdrawn from the litigation.

 

David Neustadt, a spokesman for the New York Department of Financial Services, didn’t respond to an e-mail seeking comment. The department combines the former state banking and insurance departments. Kevin Brown, an MBIA spokesman, didn’t respond to an e-mail seeking comment.

 

The case is ABN Amro Bank v. Dinallo, 601846-2009, New York State Supreme Court (Manhattan).

 

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net.

 

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

 

Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone/

[PlanMaestro]

MBIA didn’t tell the New York insurance department about a 2008 Lehman Brothers study paid for by MBIA that analyzed expected losses tied to mortgage debt and indicated MBIA Insurance Corp. was insolvent, the plaintiffs said in court papers filed today and dated March 16.

 

I am a BAC shareholder but this just looks like litigating for negotiation sake considering that MBIA has shown solvency (after a few good negotiations itself).

[goldfinger]

Quote from: jlcawood on Today at 11:24:40 AM

 

    MBIA didn’t tell the New York insurance department about a 2008 Lehman Brothers study paid for by MBIA that analyzed expected losses tied to mortgage debt and indicated MBIA Insurance Corp. was insolvent, the plaintiffs said in court papers filed today and dated March 16.

 

 

I am a BAC shareholder but this just looks like litigating for negotiation sake considering that MBIA has shown solvency (after a few good negotiations itself).

 

Especially when most of this is not new but has been claimed over and over again. They are trying to negotiate!

[PlanMaestro]

Looks like a good article.

 

http://newsandinsight.thomsonreuters.com/Legal/News/2012/04_-_April/Latest_NY_appeals_ruling_is_bad_news_for_BofA_in_monoline_cases/

 

Latest NY appeals ruling is bad news for BofA in monoline cases

Alison Frankel

 

Ordinarily, there's not much reason to get excited about a state intermediate appeals court upholding a procedural ruling by a trial court judge. But in the litigation between bond insurers and mortgage-backed securities issuers, decisions are not only magnified by the tens of billions of dollars at stake, but also by the paucity of precedent. Almost every ruling is groundbreaking, which means that decisions have an impact far beyond a single case.

 

With that in mind, there are two reasons why a ruling Thursday by the New York Appellate Division, First Department, is a setback for Bank of America: timing and authority.

 

Without much comment, the state appeals court affirmed two rulings by New York State Supreme Court Justice Eileen Bransten, who last fall denied motions by Bank of America to sever and consolidate successor liability claims against the bank in four bond insurer cases against Countrywide. "The court properly exercised its discretion in denying defendant's motion to sever plaintiffs' successor liability claims from the primary claims and to consolidate them, for purposes of discovery, in a single action," the appellate decision said. "The successor liability actions are at completely different stages of discovery, and consolidation would result in undue delay."

 

Delay was one of BofA's primary objectives in the motion to consolidate the monolines' claims against it. Successor liability, as I've explained, means that when Bank of America acquired Countrywide, it took on legal responsibility for all the wrongs committed by the onetime mortgage giant. That's a tougher question than you might think. When Stanford Law School professor Robert Daines analyzed BofA's successor liability in connection with the bank's proposed $8.5 billion put-back settlement with Countrywide MBS investors, it took him 58 pages to conclude that BofA probably wasn't liable, but might be if a judge concluded its acquisition of Countrywide was a de facto merger under New York state law. Even the applicable state law, however, is a matter of judgment: U.S. District Judge Mariana Pfaelzer, who's presiding over the consolidated Countrywide MBS litigation in federal court in Los Angeles, has applied Delaware law in dismissing successor liability claims against BofA.

 

BofA's liability for Countrywide's failings is a crucial issue for monolines and MBS investors. The bank claims that Countrywide's remaining assets are worth less than $4 billion, a tiny fraction of what MBS plaintiffs believe they're owed for the deficient securities they bought. If Bank of America were able to restrict its MBS payouts to Countrywide's assets, it could conceivably throw the subsidiary into Chapter 11 and let creditors fight over the remains.

 

But BofA has enough concerns about its own liability for Countrywide's alleged wrongs that it kicked in $8.5 billion for the proposed put-back settlement and has put aside billions more in reserves for MBS losses. Its motion to sever and consolidate the monoline successor liability claims pending against it in New York state court also indicates that BofA is in no hurry for a definitive ruling that takes into account a full record. (Pfaelzer's successor liability decisions have all been on motions to dismiss, when plaintiffs don't have the benefit of deposition testimony and document discovery to back up their arguments.) The bank's New York state-court motion would have slowed down MBIA, which is already deep in discovery on successor liability, to permit later-to-file bond insurers to catch up.

 

Instead, the appellate ruling means that MBIA can press onward and wrap up discovery. One of the looming issues, you'll recall, is whether the insurer's lawyers at Quinn Emanuel Urquhart & Sullivan can depose BofA CEO Brian Moynihan; Bransten still hasn't ruled on MBIA's motion to compel his testimony. But as BofA's lawyers at O'Melveny & Myers disclosed in the spat over Moynihan's deposition, lots of other bank officials -- including former CEO Ken Lewis, former chief risk officer Amy Brinkley, and CFO Joseph Price -- have been or will be questioned about whether the Countrywide acquisition was a de facto merger. Document production is almost complete, expert reports are underway, and summary judgment motions are due on Aug. 3. That's not a long way off for Bank of America, considering that Bransten's ruling will affect parallel successor liability claims by Ambac, Financial Guaranty Insurance, and Syncora.

 

It's also significant that the state appeals court has once again endorsed a ruling by Bransten, who has established herself as the leading state-court judge in the monoline MBS litigation. Bransten has not yet been overturned on a substantive MBS ruling. That's significant as the First Department considers appeals and cross appeals of Bransten's loss causation decisions from earlier this year. It's also important because the New York justice, unlike Pfaelzer in federal court, is generally sympathetic toward the bond insurers. If I were Bank of America, I wouldn't be looking forward to the prospect of a precedent-setting Bransten ruling on successor liability.

The bank still has a chance to move to stay the MBIA successor liability issue after discovery is closed, since the First Department ruling addressed only whether the claims should be consolidated for discovery. BofA may ask Bransten to hold off on a summary judgment ruling in MBIA's case until the other bond insurers have caught up. The judge has previously expressed concern about giving MBIA the day in court it deserves, however, so it would be a surprise if she halted MBIA's case at the brink of a crucial ruling.