MBI - MBIA Inc.

[MYDemaray]

 

Also, I should point out I'm an Ackman fan, though I can't say I totally disagree with Martin Whitman's initial comments about Ackman.

 

My general sense of Ackman is he just wants to win, no matter what, and that can sometimes distort his view of reality.

 

Completely agree -- we are all vulnerable to self-deception, and it is always easier to spot (and be judgmental about) in others.  Both Brown & Ackman strike me as headstrong, which is probably why they've both gotten as far as they have.

 

I like the MBIA thesis, but just haven't gotten comfortable with some of the issues surrounding it...best of luck to all of the longs here -- but not too much luck, given that I'm a BAC holder ;-)

[valuecfa]

The recoveries are prebooked to structured finance unit, not the rest of the company.

 

Do you not see that as aggressive?

 

On an iPhone so can't get too detailed at the moment. But the accountants have signed off in it...to book it has to be probable and have a reliable estimate. Whether I consider it aggressive is irrelevant. The point I was making is that I believe u need to think of mbia as 2 separate companies now. The prebooked recoveries are a call option on the structured finance unit, whereas national is the gem.I would think of there book values as separate. As a matter of fact I think there will eventually be a spinoff of structured finance to clear up the confusion of the mixed assets/liabilities.

[txlaw]

The recoveries are prebooked to structured finance unit, not the rest of the company.

 

Do you not see that as aggressive?

 

On an iPhone so can't get too detailed at the moment. But the accountants have signed off in it...to book it has to be probable and have a reliable estimate. Whether I consider it aggressive is irrelevant. The point I was making is that I believe u need to think of mbia as 2 separate companies now. The prebooked recoveries are a call option on the structured finance unit, whereas national is the gem.I would think of there book values as separate. As a matter of fact I think there will eventually be a spinoff of structured finance to clear up the confusion of the mixed assets/liabilities.

 

I'd love to see a sale of the structured finance sub to someone who wants to reap the benefits of runoff . . .

[MYDemaray]

On an iPhone so can't get too detailed at the moment. But the accountants have signed off in it...to book it has to be probable and have a reliable estimate. Whether I consider it aggressive is irrelevant. The point I was making is that I believe u need to think of mbia as 2 separate companies now. The prebooked recoveries are a call option on the structured finance unit, whereas national is the gem.I would think of there book values as separate. As a matter of fact I think there will eventually be a spinoff of structured finance to clear up the confusion of the mixed assets/liabilities.

 

Thanks for that perspective

[valuecfa]

On an iPhone so can't get too detailed at the moment. But the accountants have signed off in it...to book it has to be probable and have a reliable estimate. Whether I consider it aggressive is irrelevant. The point I was making is that I believe u need to think of mbia as 2 separate companies now. The prebooked recoveries are a call option on the structured finance unit, whereas national is the gem.I would think of there book values as separate. As a matter of fact I think there will eventually be a spinoff of structured finance to clear up the confusion of the mixed assets/liabilities.

 

Thanks for that perspective

 

I should caveat that prior response with mbia's need to get their intracompany loan paid back eventually. Damn u Parsad!(with this message board). I will never get any work done today

[JRH]

I'm surprised that nobody has asked whether MBIA's recent consent solicitation on the bonds gives BAC a new and superior avenue of appeal if they lose the article 78 judgment.  I don't have the legal background to comment, but my common-sense view is that it is anything but clear.  A couple months ago, it seemed to me like Kapnick was benefiting BAC by withholding judgment; now I could imagine she is benefiting MBIA.

[ERICOPOLY]

I feel that getting the bond solicitation done made a ruling on the split all that more unlikely in the absence of a monetization of the legal receivable.

 

While it seems that BAC is the only loser in court, MBIA loses as well by potentially not getting National back up and running right away (as the clock ticks, it's foregone profits).

 

Neither wins in court.

[Kraven]

I feel that getting the bond solicitation done made a ruling on the split all that more unlikely in the absence of a monetization of the legal receivable.

 

While it seems that BAC is the only loser in court, MBIA loses as well by potentially not getting National back up and running right away (as the clock ticks, it's foregone profits).

 

Neither wins in court.

 

I am no expert in complex restructurings, however I will pass along my views.  Whether or not the consent was obtained and whether or not they monetize the legal receivable should have no bearing on actions taken a number of years ago.  In the Article 78 proceeding to win all MBIA needs to do essentially is show that the insurance commissioner wasn't insane.  That's a very high bar. 

 

Many of the same issues are relevant in this case and the plenary matter.  However, in a fradulent conveyance case the primary issue is whether a party knowing they are insolvent (or soon to be insolvent) assigned or somehow transferred assets with an intent to defraud other creditors.  The timing on these matters normally encompasses some time between 90 days and a year or so (I don't recall the details). 

 

So take the elements.  One, you need insolvency.  Was MBIA or any subsidiary insolvent at the time they did the split?  Given that they have continued to pay their debts as they have become due and still (3-4 years later) have that ability, I don't see how they are now or have been during that time insolvent.  Assume they were though.  Did they intend to defraud?  That's tough to prove. There is a presumption on transfer done with the applicable time frame, but again one needs insolvency.  Where is it?

 

Further, whatever happens now, 3-4 years later doesn't change the facts at the time then.  Assume a person sells their car.  3 years later they declare bankruptcy.  Was that a fraudulent conveyance?  No.  As I've said, anything can happen in litigation, but I struggle with how the facts are not completely on MBIA's side in these matters.

[ERICOPOLY]

Given that they have continued to pay their debts as they have become due and still (3-4 years later) have that ability, I don't see how they are now or have been during that time insolvent.  Assume they were though.  Did they intend to defraud?

 

I could take loans from my father/uncle/brother in order to have the liquidity to pay my bills.

 

Why is there an intra-company loan?  If they can survive apart from National, then why do they rely on Nationa's liquidity?

 

I don't really understand why they set themselves up for those questions.  Why not just borrow from the markets?  Did they get a more favorable price from National because MBIA is trying to put lipstick on a pig?  In other words, if the split were already approved and that loan had to be refinanced, would National treat the next loan differently?

[Kraven]

Given that they have continued to pay their debts as they have become due and still (3-4 years later) have that ability, I don't see how they are now or have been during that time insolvent.  Assume they were though.  Did they intend to defraud?

 

I could take loans from my father/uncle/brother in order to have the liquidity to pay my bills.

 

Why is there an intra-company loan?  If they can survive apart from National, then why do they rely on Nationa's liquidity?

 

I don't really understand why they set themselves up for those questions.  Why not just borrow from the markets?  Did they get a more favorable price from National because MBIA is trying to put lipstick on a pig?  In other words, if the split were already approved and that loan had to be refinanced, would National treat the next loan differently?

 

Insolvency is not determined by whether or not you took loans.  The basic test for insolvency is an inability to pay one's debts as they come due in the ordinary course.  MBIA has not met this test.  They have paid their debts as they come due.  Note that the CDS on the CMBS where BAC is a protection buyer are not debts.  They are contracts that don't have any incipient default.  Nothing is imminent, nothing is in default currently and thus nothing is due. 

 

A vast array of companies use borrowing to help fund their endeavors.  If they didn't have that funding, they would fold.  I mean what you're saying is that if you don't have enough cash in the bank, you are insolvent.  That isn't the definition of insolvency.  There is nothing nefarious about an intercompany loan.  Most companies with subsidiaries have them, it's just not seen as the books are consolidated.  I can't speak to why they did that instead of tapping the capital markets.  Obviously it was easier to do it this way, but it doesn't mean it raises a red flag in and of itself.

[ERICOPOLY]

Given that they have continued to pay their debts as they have become due and still (3-4 years later) have that ability, I don't see how they are now or have been during that time insolvent.  Assume they were though.  Did they intend to defraud?

 

I could take loans from my father/uncle/brother in order to have the liquidity to pay my bills.

 

Why is there an intra-company loan?  If they can survive apart from National, then why do they rely on Nationa's liquidity?

 

I don't really understand why they set themselves up for those questions.  Why not just borrow from the markets?  Did they get a more favorable price from National because MBIA is trying to put lipstick on a pig?  In other words, if the split were already approved and that loan had to be refinanced, would National treat the next loan differently?

 

Insolvency is not determined by whether or not you took loans.  The basic test for insolvency is an inability to pay one's debts as they come due in the ordinary course.  MBIA has not met this test.  They have paid their debts as they come due.  Note that the CDS on the CMBS where BAC is a protection buyer are not debts.  They are contracts that don't have any incipient default.  Nothing is imminent, nothing is in default currently and thus nothing is due. 

 

A vast array of companies use borrowing to help fund their endeavors.  If they didn't have that funding, they would fold.  I mean what you're saying is that if you don't have enough cash in the bank, you are insolvent.  That isn't the definition of insolvency.  There is nothing nefarious about an intercompany loan.  Most companies with subsidiaries have them, it's just not seen as the books are consolidated.  I can't speak to why they did that instead of tapping the capital markets.  Obviously it was easier to do it this way, but it doesn't mean it raises a red flag in and of itself.

 

 

My suspicion is that a below-market interest rate from National would be a back-door means of making MBIA Corp stronger and more able to pay claims than it really is.  Thus perhaps intentionally deceptive.  What I don't know is whether National gave them market terms.

[Kraven]

My suspicion is that a below-market interest rate from National would be a back-door means of making MBIA Corp stronger and more able to pay claims than it really is.  Thus perhaps intentionally deceptive.  What I don't know is whether National gave them market terms.

 

Off market terms like a low interest rate would likely be a bad fact if it was shown that the only way they were able to survive was due to an intercompany loan that should be on arms length terms.  I don't know though whether or not that would make one insolvent and thus subject to potential fraudulent conveyance claims.  Somebody who is more familiar with restructurings could answer that.

[JRH]

Further, whatever happens now, 3-4 years later doesn't change the facts at the time then.  Assume a person sells their car.  3 years later they declare bankruptcy.  Was that a fraudulent conveyance?  No.  As I've said, anything can happen in litigation, but I struggle with how the facts are not completely on MBIA's side in these matters.

 

Leaving aside the question of what constitutes "insurance", is there a separate standard for what leaves an insurance company materially worse off in regard to their capacity to pay out claims?  Imagine any insurer with a highly variable claims stream (reinsurance, for instance)... going years without insolvency is not a sufficient measure of whether a change in capital structure left the policyholders materially worse off.  At best, it affects them probabilistically.

 

I think I am also implying that any appeal would claim the standard for judgment (arbitrary and capricious act by the regulator) is the wrong standard or would otherwise try to attack the case from a different angle.

 

Oh, and please excuse my general legal ineptitude.

[Rabbitisrich]

The insolvency definition confused me as well. But there was a favorable decision in early 2011 regarding transformation, where the majority refused to perceive insolvency without an actual delinquency, or what investors might think of as a liquidity test. BAC's argument at the time seemed to refer to a FMV of net worth at a point in time, like in the aborted BCE - Teacher's Union merger.

[valuecfa]

Structured finance had the assets and equity to pay off claims, just not the liquidity. It's all a bit perverse that BAC was claiming insolvency when they were the ones inducing the liquidity crunch in the first place by not honoring their contracts.

[Kraven]

Further, whatever happens now, 3-4 years later doesn't change the facts at the time then.  Assume a person sells their car.  3 years later they declare bankruptcy.  Was that a fraudulent conveyance?  No.  As I've said, anything can happen in litigation, but I struggle with how the facts are not completely on MBIA's side in these matters.

 

Leaving aside the question of what constitutes "insurance", is there a separate standard for what leaves an insurance company materially worse off in regard to their capacity to pay out claims?  Imagine any insurer with a highly variable claims stream (reinsurance, for instance)... going years without insolvency is not a sufficient measure of whether a change in capital structure left the policyholders materially worse off.  At best, it affects them probabilistically.

 

I think I am also implying that any appeal would claim the standard for judgment (arbitrary and capricious act by the regulator) is the wrong standard or would otherwise try to attack the case from a different angle.

 

Oh, and please excuse my general legal ineptitude.

 

I don't know the answer to your questions.  What I will say is that there has to be certainty in business dealing.  That's how the law attempts to operate.  That's why there are typically parameters set around how far out one can go in order to determine something like a fraudulent conveyance.  Parties need to know that if they do something it will be ok, or know what risks they are taking.

 

Think about it from the opposite view.  Say events that occur in a company's life at anytime could mean something like a fraudulent conveyance occurred.  Who would buy an asset then?  What I am trying to say is suppose ABC Corp bought a pool of loans from XYZ Corp.  It is determined 4 years later that XYZ is insolvent.  If the bankruptcy trustee could reach out and pull the loans from ABC Corp think of the disuption in the market.  One ABC would then never know what it's status really is.  Also, what if some of those loans had been sold off, or paid down?  Too many variables.  That's why the analysis is a contained one.  What occurs now should have no bearing on what occurred 3-4 years ago.

[ERICOPOLY]

Structured finance had the assets and equity to pay off claims, just not the liquidity. It's all a bit perverse that BAC was claiming insolvency when they were the ones inducing the liquidity crunch in the first place by not honoring their contracts.

 

It's convenient that BAC bought both Countrywide and Merrill.

 

Countrywide is introducing the liquidity crunch and the Merrill managers don't control what Countrywide does.

 

Things could have worked out differently.  Citi could have bought Countrywide and Wells could have bought Merrill.  Then the exact same situation would be happening perhaps, yet there could be no "conspiracy" claim.

 

The glue that is holding the split together, ironically, is BofA itself.  Without BofA's deep pockets Countrywide may not be able to pay (the recievable asset would have to be valued accordingly) and Merrill would still be demanding their contract be upheld.

 

Merrill probably paid a little bit of extra premium for the diversity of business that MBIA was offering at the time.  The peace of mind that if the structure finance markets blew up, there would be some security from the Municipal business. 

 

What happened afterwards is bait and switch -- no, you didn't buy insurance from a diversified insurere, you got a highly concentrated structured finance insurer in the end.

[ERICOPOLY]

Who would buy an asset then? 

 

 

I agree with your point but the same question could be asked of this:  "Does it weaken the markets faith in purchasing insurance when both the commissioners and the courts will work to allow the insurance company to wiggle out and wall off assets when storm clouds gather?"

 

It is a bit weird -- I would be a bit pissed personally just on the principle of the matter if I chose a diversified insurer when I bought a policy, only to have them undiversify (to their own profit and to my increased risk) when storm clouds turned dark.

 

[prunes]

Can't you argue that MBIA's customers are sophisticated institutions that should have been aware of this risk and that if they wanted to avoid it would have written as such into their contracts?

[JRH]

I agree with your point but the same question could be asked of this:  "Does it weaken the markets faith in purchasing insurance when both the commissioners and the courts will work to allow the insurance company to wiggle out and wall off assets when storm clouds gather?"

 

It is a bit weird -- I would be a bit pissed personally just on the principle of the matter if I chose a diversified insurer when I bought a policy, only to have them undiversify (to their own profit and to my increased risk) when storm clouds turned dark.

 

It's quite interesting.  It obviously runs counter to basic principles of capital structure (counterparties/policyholders, then debt, then equity) - you're unambiguously preferring equity to counterparty/policyholder promises.  Debt, as we've recently seen, gets pushed and pulled all over the place in between.

 

It's also interesting (read as: confusing as all hell?) because you have a regulator that seems to be preferring some counterparties/policyholders (munis) to others (structured finance) by allowing the restructuring.  I'm not saying that's not their purview - I don't know that.  I wonder if the structured finance counterparties thought about that preference when they did business with MBIA in the first place.

[Rabbitisrich]

 

 

Think about it from the opposite view.  Say events that occur in a company's life at anytime could mean something like a fraudulent conveyance occurred.  Who would buy an asset then?  What I am trying to say is suppose ABC Corp bought a pool of loans from XYZ Corp.  It is determined 4 years later that XYZ is insolvent.  If the bankruptcy trustee could reach out and pull the loans from ABC Corp think of the disuption in the market.  One ABC would then never know what it's status really is.  Also, what if some of those loans had been sold off, or paid down?  Too many variables.  That's why the analysis is a contained one.  What occurs now should have no bearing on what occurred 3-4 years ago.

 

In terms of fraudulent conveyance, there is already a 2 year limit on litigation from the time of conveyance, probably for the reason you describe. But I would wager that the negative effect of uncertainty due to potential clawback litigation is smaller than the downside of improving the ability of firms of shuffle assets pre-bankruptcy petition.

 

The NY Supreme Court ruling in favor of transformation, from Jan. 2011, used a liquidity test to determine the inability to show insolvency, but this bankruptcy ruling employed different methods:

http://www.kccllc.net/documents/0810928/0810928091014000000000003.pdf

 

In the "Findings of Law..." section, the judge laid out an extensive narration to show that the conveyor was left with "unreasonably small capital". He covers everything from public housing market information, to internal discussions between operating and financing parties, to the behavior of creditors during the bargaining process. He assesses the "ability to pay debt as they come due" test by looking at internal communications, and debt prices and ratings. And then he accepts expert testimony reliant upon FMV definitions of insolvency.

[Rabbitisrich]

If you broadly apply the reasoning from the NY appellate court in 2011, you simply have to supply enough funds to a subsidiary to pay debts for two years to runout the timeline for bringing a fraudulent transfer claim. I thought that you would have to pull an Allied Capital and at least claim that some appreciating asset would cover future claims, but rereading the decision, that is unnecessary. You just have to show that the potential claimant has not experienced monetary damages, and therefore has no cause of action.

 

http://www.mbia.com/investor/publications/011111_mbiadecision.pdf

 

[ERICOPOLY]

Can't you argue that MBIA's customers are sophisticated institutions that should have been aware of this risk and that if they wanted to avoid it would have written as such into their contracts?

 

What's next?

 

Could National be split in two down the road when California gets into a crisis so that the California policies are walled off in a runoff subsidiary by the New York insurance commissioner, thus allowing so that New York municipal business won't have impaired liquidity?

 

Shouldn't everybody be sophisticated enough to see that coming?

[Kraven]

Judge Kapnick says the ruling is "getting there". 

 

http://www.reuters.com/article/2012/12/06/mbia-restructuring-idUSL1E8N6FKO20121206?type=companyNews&feedType=RSS&feedName=companyNews&rpc=43

[ERICOPOLY]

I realize it sounds like I'm a bit biased.  I just hate the constant drumbeat that suggests MBI is being bullied up by evil lawyers at BAC.  That latest letter from Jay Brown even labeled BofA as a bad actor in the financial crisis.

 

I think if Countrywide had been bought by nobody at all (just going directly to bankruptcy), then the managers at MBI would be living in a completely different reality (of entirely their own making).  They would not be singing this "oh poor me" tune at all.  These guys completely drove their company into the ground and Ken Lewis effectively bailed them out.