MBI - MBIA Inc.

[ERICOPOLY]

MBIA itself makes the argument that Bank of America is putting MBIA Insurance Corp at risk of "rehabilitation or liquidation".

 

So in light of this, how can Kapnick approve the split?  Didn't MBIA just tell her that MBIA Insurance Corp is in jeopordy and at the mercy of BofA?  Yet she is expected to rule in favor of the split?  Kapnick has not control over whether BofA will ever pay.

 

 

http://www.mbia.com/MBIA-Inc-Statement2.pdf

 

it is not the Consent Solicitation that increases the risk of MBIA Insurance Corp. being placed in rehabilitation or liquidation, rather it is BofA’s own refusal to honor its obligations and its strategy of delaying the put back litigation.

 

[mpauls]

You are assuming she will make a ruling before the end of the Putback trial.  I doubt that.  There will be a settlement here, which means that she won't end up rulling.

[ERICOPOLY]

You are assuming she will make a ruling before the end of the Putback trial.  I doubt that.  There will be a settlement here, which means that she won't end up rulling.

 

I meant to imply that she would rule to block the split if a bankruptcy filing were imminent.  That might come before the end of the putback trial.

 

MBIA can argue that the split is working out for MBIA Insurance Corp policyholders until the split is no longer working out for MBIA Insurance Corp policyholders.

 

EDIT:  Why would the insurance regulator be upset with BofA over this?  Isn't the real problem in the first place that MBIA Insurance Corp was walled off from the good assets of National so that Jay Brown can keep his money at the expense of policyholders if that subsidiary goes under?

 

[valuecfa]

Jeez. I go to Laos & northern Thailand for a few weeks and I login to find this drama. I have to admit I didn't see this move by BAC. I can't believe the price they are willing to play. I'm on an iPhone so can't do the proper searching( for some reason it is not loading certain webpages and the wifi is slow). Can someone please remind me of the schedule regarding summary judgement on the reps & warranties trial? Has anyone looked at the volume on the bonds in question the past few days? I wonder if the friends of MBI make the next move. Looking at Berkowitz positions he will protect his interest in the common if necessary given that down the road there could only be a liquidity question as opposed to a credit question. Interesting developments. Other players beside including Fairholme could provide liquidity backstop if it actually became necessary.

[muscleman]

Look,

 

(i) BAC has no interest in bankrupting MBIA. 

Who knows what exactly started this tit-for-tat, but MBIA must have considered that BAC would respond the way they did, and BAC must have considered MBIA might try this at some stage. 

 

(ii) MBIA does not have a liquidity problem right now. 

MBIA has some $325mil-ish in cash and liquid investments on hand.  BAC knows the only way to squeeze MBIA is by squeezing their liquidity position and the only way they can (indirectly) facilitate this is by screwing around with Lacrosse Financial-MBIA entity responsible for 6.15bn of the $9.1bn CDS exposure (the difference being the first loss amount, which some refer to as a deductible). 

 

My guess is that MBIA is afraid that "someone" might try to accelerate losses by liquidating certain reference obligations or similar.  Begs all kinds of other questions, but if MBIA is to have liquidity problems, this is where it will take place.  It's a fine line though for BAC if they try to play this card, bc they want to squeeze it but they don't want it to pop.

 

Moreover:

MBIA want BAC to commute the remaining exposures (namely the 6.15bn CMBS exposures) for free (They apply the same logic as with putbacks).  If you are BAC you want a fair price for these expected losses.  So the question is what is a fair price for exposure of 6.15bn a portion of which is probably foreseeable? There are also commutations for remaining RMBS exposures, when you add these up, it's easy to see BAC wanting ~2-3bn to commute.  If MBIA gets 3bn in putbacks it's almost net $0, which probably doesn't fly with MBIA.  Given we are so close to trial, MBIA probably feel that they have the upper hand-which is the big disconnect between what "the markets" think and what is probably the case.  Of course BAC can continue to squeeze, but at what point does the regulator jump in?  So on the one hand they can squeeze, but they don't know how hard is too hard and on the other hand they don't want this thing to go to trial. 

 

Settle for more than you want to pay, or tighten the squeeze as we approach court decisions but risk having the whole thing blow up?

 

Does the 325m belong to structured division or the muni division? I have never doubted the strength of its muni division. Will the structured financed division survive all the way until the battle ends? I bet it will drag another 12 months, and then BAC will appeal to drag it another few years longer.

 

[mpauls]

Jeez. I go to Laos & northern Thailand for a few weeks and I login to find this drama. I have to admit I didn't see this move by BAC. I can't believe the price they are willing to play. I'm on an iPhone so can't do the proper searching( for some reason it is not loading certain webpages and the wifi is slow). Can someone please remind me of the schedule regarding summary judgement on the reps & warranties trial? Has anyone looked at the volume on the bonds in question the past few days? I wonder if the friends of MBI make the next move. Looking at Berkowitz positions he will protect his interest in the common if necessary given that down the road there could only be a liquidity question as opposed to a credit question. Interesting developments. Other players beside including Fairholme could provide liquidity backstop if it actually became necessary.

 

 

 

Recovery Litigation

MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al.; Index No. 602825/08 (N.Y. Sup. Ct., N.Y.

County)

 

Argument is scheduled for December 5 to 6, 2012.

 

On September 28, 2012, MBIA and Bank of America filed motions for summary judgment

regarding Bank of America’s successor liability.

 

Argument is scheduled for December 12 to 13, 2012.

 

[muscleman]

Look,

 

(i) BAC has no interest in bankrupting MBIA. 

Who knows what exactly started this tit-for-tat, but MBIA must have considered that BAC would respond the way they did, and BAC must have considered MBIA might try this at some stage. 

 

(ii) MBIA does not have a liquidity problem right now. 

MBIA has some $325mil-ish in cash and liquid investments on hand.  BAC knows the only way to squeeze MBIA is by squeezing their liquidity position and the only way they can (indirectly) facilitate this is by screwing around with Lacrosse Financial-MBIA entity responsible for 6.15bn of the $9.1bn CDS exposure (the difference being the first loss amount, which some refer to as a deductible). 

 

My guess is that MBIA is afraid that "someone" might try to accelerate losses by liquidating certain reference obligations or similar.  Begs all kinds of other questions, but if MBIA is to have liquidity problems, this is where it will take place.  It's a fine line though for BAC if they try to play this card, bc they want to squeeze it but they don't want it to pop.

 

Moreover:

MBIA want BAC to commute the remaining exposures (namely the 6.15bn CMBS exposures) for free (They apply the same logic as with putbacks).  If you are BAC you want a fair price for these expected losses.  So the question is what is a fair price for exposure of 6.15bn a portion of which is probably foreseeable? There are also commutations for remaining RMBS exposures, when you add these up, it's easy to see BAC wanting ~2-3bn to commute.  If MBIA gets 3bn in putbacks it's almost net $0, which probably doesn't fly with MBIA.  Given we are so close to trial, MBIA probably feel that they have the upper hand-which is the big disconnect between what "the markets" think and what is probably the case.  Of course BAC can continue to squeeze, but at what point does the regulator jump in?  So on the one hand they can squeeze, but they don't know how hard is too hard and on the other hand they don't want this thing to go to trial. 

 

Settle for more than you want to pay, or tighten the squeeze as we approach court decisions but risk having the whole thing blow up?

 

What is reference obligation?

At what rate do you think MBIA's structured finance unit will burn out cash? It seems to be that as long as the insured CDS has paper losses within the deductible range, it will be fine. But if the losses exceeds the deductible, the claim payouts could burn out cash really quickly?

[mpauls]

Jeez. I go to Laos & northern Thailand for a few weeks and I login to find this drama. I have to admit I didn't see this move by BAC. I can't believe the price they are willing to play. I'm on an iPhone so can't do the proper searching( for some reason it is not loading certain webpages and the wifi is slow). Can someone please remind me of the schedule regarding summary judgement on the reps & warranties trial? Has anyone looked at the volume on the bonds in question the past few days? I wonder if the friends of MBI make the next move. Looking at Berkowitz positions he will protect his interest in the common if necessary given that down the road there could only be a liquidity question as opposed to a credit question. Interesting developments. Other players beside including Fairholme could provide liquidity backstop if it actually became necessary.

 

 

 

Recovery Litigation

MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al.; Index No. 602825/08 (N.Y. Sup. Ct., N.Y.

County)

 

Argument is scheduled for December 5 to 6, 2012.

 

On September 28, 2012, MBIA and Bank of America filed motions for summary judgment

regarding Bank of America’s successor liability.

 

Argument is scheduled for December 12 to 13, 2012.

 

 

325m is at Structured (MBIA ins).  They will survive unless losses are accelerated within the CMBS pools which are serviced by BAC subsidiary.  Would be questionable practice by BAC if this is done.  I also don't expect them to do it, but you never know.

[Kraven]

What is reference obligation?

 

In a credit default swap the reference obligation is the security on which the contract is based.  Think of it this way.  A credit default swap is essentially insurance.  There is a protection buyer and a protection seller.  Say you own a certain CMBS and you want to buy protection on it; the CMBS in this case would be the reference obligation.  Buying protection is the same as in the insurance context.  You want to protect against losses however such losses are contractually determined.  You would be the protection buyer and pay to the counterparty (the protection seller) a certain predetermined amount.  Just like you pay monthly or semiannually or annually on a house or car insurance.  If the reference obligation defaults or has some other kind of payment issue the protection seller needs to essentially make you whole.  That is determined typically by gathering market prices and then simply calculating the difference between par and the current price.  In other situations the security could simply be put to the protection seller for par.  It's hard to be exact because although there are ISDA forms which provide a framework and basis for these deals, all of it is subject to individual negotiation.

[mpauls]

Note: Quantity is par value traded

 

Issue: MBI.HF Description: MBIA INC Coupon Rate: 5.700 Maturity Date: 12/01/2034

 

ExecutionDate,Time Settlement,Status,Quantity,Price,Yield,Commission,Modifier,2nd Modifier,Special As Of Reporting Party Side

 

11/16/2012 12:34:23 11/21/2012 12:00:00 AM T 20000. 87.448 6.807 N D

11/16/2012 12:34:23 11/21/2012 12:00:00 AM T 20000. 87.548 6.798 N S

11/15/2012 16:52:43 11/20/2012 12:00:00 AM T 43000. 87.486 6.804 N D

11/15/2012 16:52:43 11/20/2012 12:00:00 AM T 43000. 87.586 6.794 N S

11/15/2012 16:43:20 11/20/2012 12:00:00 AM T 25000. 87.486 6.804 N D

11/15/2012 16:43:20 11/20/2012 12:00:00 AM T 25000. 87.586 6.794 N S

11/15/2012 16:41:55 11/20/2012 12:00:00 AM T 5000. 85.558 6.994 N B

11/15/2012 16:40:47 11/20/2012 12:00:00 AM T 5000. 85.558 6.994 N D

11/15/2012 16:38:41 11/20/2012 12:00:00 AM T 8000. 87.625 6.790 N S

11/15/2012 16:38:36 11/20/2012 12:00:00 AM T 8000. 87.500 6.802 N D

11/15/2012 16:38:36 11/20/2012 12:00:00 AM T 8000. 87.500 6.802 N D

11/15/2012 13:07:58 11/20/2012 12:00:00 AM T 43000. 86.130 6.937 N D

11/15/2012 13:07:58 11/20/2012 12:00:00 AM T 43000. 86.130 6.937 N D

11/15/2012 13:07:00 11/20/2012 12:00:00 AM T 43000. 85.825 6.967 N B

11/15/2012 12:40:48 11/20/2012 12:00:00 AM T 5000. 87.700 6.783 N S

11/15/2012 12:40:43 11/20/2012 12:00:00 AM T 5000. 87.500 6.802 N D

11/15/2012 12:40:43 11/20/2012 12:00:00 AM T 5000. 87.500 6.802 N D

11/15/2012 12:31:12 11/20/2012 12:00:00 AM T 40000. 87.450 6.807 N D

11/15/2012 12:31:12 11/20/2012 12:00:00 AM T 40000. 87.450 6.807 N D

11/15/2012 12:31:12 11/20/2012 12:00:00 AM T 40000. 87.433 6.809 N D

11/15/2012 12:31:12 11/20/2012 12:00:00 AM T 40000. 87.550 6.797 N S

11/15/2012 12:28:03 11/20/2012 12:00:00 AM T 13000. 87.500 6.802 N D

11/15/2012 12:28:03 11/20/2012 12:00:00 AM T 13000. 87.600 6.793 N S

11/15/2012 12:28:03 11/20/2012 12:00:00 AM W 13000. 87.499 6.802 N Z A D

11/15/2012 12:28:03 11/20/2012 12:00:00 AM W 13000. 87.599 6.793 N Z A S

11/15/2012 11:36:21 11/20/2012 12:00:00 AM T 1MM+ 88.000 6.754 N B

11/15/2012 11:09:12 11/20/2012 12:00:00 AM T 10000. 85.000 7.050 N D

11/15/2012 11:09:11 11/20/2012 12:00:00 AM T 10000. 85.000 7.050 N D

11/15/2012 11:09:11 11/20/2012 12:00:00 AM T 10000. 83.939 7.159 N B

11/15/2012 10:18:48 11/20/2012 12:00:00 AM T 13000. 85.500 7.000 N D

11/15/2012 10:18:47 11/20/2012 12:00:00 AM T 13000. 85.500 7.000 N B

11/15/2012 10:18:47 11/20/2012 12:00:00 AM T 13000. 85.500 7.000 N D

11/15/2012 10:18:12 11/20/2012 12:00:00 AM T 17000. 85.500 7.000 N D

11/15/2012 10:18:10 11/20/2012 12:00:00 AM T 17000. 85.500 7.000 N B

11/15/2012 10:18:10 11/20/2012 12:00:00 AM T 17000. 85.500 7.000 N D

11/15/2012 09:10:06 11/20/2012 12:00:00 AM T 150000. 92.500 6.335 N D

11/15/2012 09:10:06 11/20/2012 12:00:00 AM T 150000. 92.500 6.335 N S

11/15/2012 09:10:06 11/20/2012 12:00:00 AM W 140000. 92.500 6.335 N D

11/15/2012 09:10:06 11/20/2012 12:00:00 AM T 140000. 92.500 6.335 N S

[Kraven]

MBIA just filed an 8-K stating that Moody's has informed them that as a result of the consent solicitation and BAC counter punch brouhaha, Moody's "expects" to consider the ratings of MBIA Inc, MBIA Corp and National.  Very strange to file an 8-K on this.  This just seems to be another attempt to raise the issue of their battle with BAC.  It's either very savvy or very stupid.  Time will tell.  At this point though it's like 2 kids fighting over some obscure point of contention.  At some point, you stop caring what the issue really was and just want them to stop.

[JRH]

MBIA just filed an 8-K stating that Moody's has informed them that as a result of the consent solicitation and BAC counter punch brouhaha, Moody's "expects" to consider the ratings of MBIA Inc, MBIA Corp and National.  Very strange to file an 8-K on this.  This just seems to be another attempt to raise the issue of their battle with BAC.  It's either very savvy or very stupid.  Time will tell.  At this point though it's like 2 kids fighting over some obscure point of contention.  At some point, you stop caring what the issue really was and just want them to stop.

 

One possible reason for disclosure "above and beyond" - could be covering their bases if there is insider buying or selling being contemplated.

[Kraven]

MBIA just filed an 8-K stating that Moody's has informed them that as a result of the consent solicitation and BAC counter punch brouhaha, Moody's "expects" to consider the ratings of MBIA Inc, MBIA Corp and National.  Very strange to file an 8-K on this.  This just seems to be another attempt to raise the issue of their battle with BAC.  It's either very savvy or very stupid.  Time will tell.  At this point though it's like 2 kids fighting over some obscure point of contention.  At some point, you stop caring what the issue really was and just want them to stop.

 

One possible reason for disclosure "above and beyond" - could be covering their bases if there is insider buying or selling being contemplated.

 

Interesting.  That would be highly unusual, but I guess it could happen.

 

Any bank regulatory people on the board?  Any restrictions (other than capital levels) on BAC's ability to buy MBIA's bonds if there was a downgrade?  MBIA could get pushed into the triple C range.  Perhaps MBIA is telegraphing this?  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

[ERICOPOLY]

  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

 

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA.

 

So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

[Kraven]

  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

 

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA.

 

So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

 

All true, but conjecture.  Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them.  That is, they aren't in the business of trying to handicap a contentious litigation.  I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle.  The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face."  I think this may, just may have put up a roadblock for BAC.  I'd love a bank regulatory person to weigh in if any around here.

[JRH]

One possible reason for disclosure "above and beyond" - could be covering their bases if there is insider buying or selling being contemplated.

Interesting.  That would be highly unusual, but I guess it could happen.

 

Yes, outside possibility in any case, but if you were Joe Brown and wanted to make an insider transaction in the midst of all of the turmoil, the first thing you'd do is check to make sure you didn't have any material, unpublicized "insider information" laying around.

 

Very rarely a "smoking gun" type of situation, but I've seen quite a few situations where I got the feeling it was happening.  Could just be confirmation bias.

[ERICOPOLY]

  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

 

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA.

 

So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

 

All true, but conjecture.  Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them.  That is, they aren't in the business of trying to handicap a contentious litigation.  I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle.  The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face."  I think this may, just may have put up a roadblock for BAC.  I'd love a bank regulatory person to weigh in if any around here.

 

Is it depositor money?  Perhaps they'll buy it at the parent company.  I can't imagine that regulators would wince about BAC flushing $130m down the drain.  What are they going to do if BAC asks for a $15 billion capital return?

 

[Kraven]

  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

 

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA.

 

So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

 

All true, but conjecture.  Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them.  That is, they aren't in the business of trying to handicap a contentious litigation.  I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle.  The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face."  I think this may, just may have put up a roadblock for BAC.  I'd love a bank regulatory person to weigh in if any around here.

 

Is it depositor money?  Perhaps they'll buy it at the parent company.  I can't imagine that regulators would wince about BAC flushing $130m down the drain.  What are they going to do if BAC asks for a $15 billion capital return?

 

Yeah, you're right.  Obviously isn't depositor money at the hold co.  I am not sure though they view things through the prism of $15 bil vs $130 mil.  It's all about optics.  Everything is.  $130 mil is still real money.  John Thain got nailed for spending $1 mil or so on his office renovation.  Clearly that didn't do anything to Merrill one way or the other, but it's the optics.  If BAC has an issue in the near future, $130 mil "wasted" will loom large I would think. 

[ERICOPOLY]

  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

 

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA.

 

So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

 

All true, but conjecture.  Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them.  That is, they aren't in the business of trying to handicap a contentious litigation.  I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle.  The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face."  I think this may, just may have put up a roadblock for BAC.  I'd love a bank regulatory person to weigh in if any around here.

 

Is it depositor money?  Perhaps they'll buy it at the parent company.  I can't imagine that regulators would wince about BAC flushing $130m down the drain.  What are they going to do if BAC asks for a $15 billion capital return?

 

Yeah, you're right.  Obviously isn't depositor money at the hold co.  I am not sure though they view things through the prism of $15 bil vs $130 mil.  It's all about optics.  Everything is.  $130 mil is still real money.  John Thain got nailed for spending $1 mil or so on his office renovation.  Clearly that didn't do anything to Merrill one way or the other, but it's the optics.  If BAC has an issue in the near future, $130 mil "wasted" will loom large I would think.

 

Good point about the optics.  I hope somebody with a better idea weighs in.

[muscleman]

What is reference obligation?

 

In a credit default swap the reference obligation is the security on which the contract is based.  Think of it this way.  A credit default swap is essentially insurance.  There is a protection buyer and a protection seller.  Say you own a certain CMBS and you want to buy protection on it; the CMBS in this case would be the reference obligation.  Buying protection is the same as in the insurance context.  You want to protect against losses however such losses are contractually determined.  You would be the protection buyer and pay to the counterparty (the protection seller) a certain predetermined amount.  Just like you pay monthly or semiannually or annually on a house or car insurance.  If the reference obligation defaults or has some other kind of payment issue the protection seller needs to essentially make you whole.  That is determined typically by gathering market prices and then simply calculating the difference between par and the current price.  In other situations the security could simply be put to the protection seller for par.  It's hard to be exact because although there are ISDA forms which provide a framework and basis for these deals, all of it is subject to individual negotiation.

 

I see. Thanks a lot! So if the CMBS goes worse and the losses are beyong the deductible, then MBIA may get into trouble? That makes sense. We don't know how close are the deductible limit vs the current losses, do we?

If in the worst case scenario, the structured unit goes bankruptcy, is that the end of the world? Since the regulator has already approved the split of the company, maybe that is fine, unless in 2013, BAC succeeds in the litigation to reverse that ruling?

[ERICOPOLY]

  Perhaps BAC's regulators won't be thrilled with the bank spending an extra $130 mil on debt of a potentially downgraded company knowing the downgrade is possible/possibly imminent?

 

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA.

 

So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

 

All true, but conjecture.  Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them.  That is, they aren't in the business of trying to handicap a contentious litigation.  I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle.  The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face."  I think this may, just may have put up a roadblock for BAC.  I'd love a bank regulatory person to weigh in if any around here.

 

Is it depositor money?  Perhaps they'll buy it at the parent company.  I can't imagine that regulators would wince about BAC flushing $130m down the drain.  What are they going to do if BAC asks for a $15 billion capital return?

 

Yeah, you're right.  Obviously isn't depositor money at the hold co.  I am not sure though they view things through the prism of $15 bil vs $130 mil.  It's all about optics.  Everything is.  $130 mil is still real money.  John Thain got nailed for spending $1 mil or so on his office renovation.  Clearly that didn't do anything to Merrill one way or the other, but it's the optics.  If BAC has an issue in the near future, $130 mil "wasted" will loom large I would think.

 

Speaking of Merrill though, they're the one with the massive MBIA insured asset -- it would make the best sense for Merrill to block it (buy the bonds) as a "hedge" against MBIA trying to stiff them.

 

It's easy to fall into the trap of saying "it's all BofA", but really it's not.  Originally Countrywide and Merrill were completely separate.  Our perception is that BofA is a big bad bully here, but consider an alternate reality.  What if Citigroup had purchased Countrywide and BAC owned Merrill.  Would BAC/Merrill be acting any differently here with respect to wanting to prevent the Merrill asset from falling to the mercy of the outcome from a legal receivable?  What if MBIA loses in court?

 

So, better optics.  Prudent hedge.

[Kraven]

What is reference obligation?

 

In a credit default swap the reference obligation is the security on which the contract is based.  Think of it this way.  A credit default swap is essentially insurance.  There is a protection buyer and a protection seller.  Say you own a certain CMBS and you want to buy protection on it; the CMBS in this case would be the reference obligation.  Buying protection is the same as in the insurance context.  You want to protect against losses however such losses are contractually determined.  You would be the protection buyer and pay to the counterparty (the protection seller) a certain predetermined amount.  Just like you pay monthly or semiannually or annually on a house or car insurance.  If the reference obligation defaults or has some other kind of payment issue the protection seller needs to essentially make you whole.  That is determined typically by gathering market prices and then simply calculating the difference between par and the current price.  In other situations the security could simply be put to the protection seller for par.  It's hard to be exact because although there are ISDA forms which provide a framework and basis for these deals, all of it is subject to individual negotiation.

 

I see. Thanks a lot! So if the CMBS goes worse and the losses are beyong the deductible, then MBIA may get into trouble? That makes sense. We don't know how close are the deductible limit vs the current losses, do we?

If in the worst case scenario, the structured unit goes bankruptcy, is that the end of the world? Since the regulator has already approved the split of the company, maybe that is fine, unless in 2013, BAC succeeds in the litigation to reverse that ruling?

 

Sure.  It's not an all or none thing like the media would have you believe.  There are numerous CMBS transactions which are being referenced here.  "Trouble" is difficult to define.  MBIA entered into contracts with Merrill related to various CMBS.  Each of those trades will be different.  But yes, for each one if the "deductible" is limit is reached upon various credit events, etc. then MBIA will owe money for that as determined under the contract.  We don't know how close they are.  They have said the CMBS are deteriorating somewhat, but that there are no outstanding defaults and immaterial amounts have been paid.  So it's all forward looking.  If the economy improved, etc then this could all be moot.  If it continues to deteriorate, then they will owe quite a bit of money if they haven't entered into commuatations first. 

 

If the structured unit, MBIA Corp, goes under it takes the parent, MBIA Inc with it.  That's what they're trying to get changed with their consent that's outstanding and what BAC (Merrill) wants to block.  If MBIA Corp goes under, that will cause an event of default on the parent's debt which would be accelerated and they don't have the funds to pay.  So they would need to quickly raise a lot of capital or go under.  The regulator approved the split, but that's the subject of the Article 78 proceeding as well as the related plenary proceeding.

[Kraven]

Speaking of Merrill though, they're the one with the massive MBIA insured asset -- it would make the best sense for Merrill to block it (buy the bonds) as a "hedge" against MBIA trying to stiff them.

 

It's easy to fall into the trap of saying "it's all BofA", but really it's not.  Originally Countrywide and Merrill were completely separate.  Our perception is that BofA is a big bad bully here, but consider an alternate reality.  What if Citigroup had purchased Countrywide and BAC owned Merrill.  Would BAC/Merrill be acting any differently here with respect to wanting to prevent the Merrill asset from falling to the mercy of the outcome from a legal receivable?  What if MBIA loses in court?

 

Good points.  Everyone says BAC, but that's just shorthand.  I think though that the bad blood comes from the Countrywide proceeding.  I think Merrill would be trying to hedge or something, but it probably wouldn't be so ugly.  Who knows though.  In terms of BAC being the big bad bully, you're right, that's the view, although I think it's changing in the public's perception and that's a good thing.  I personally never attribute human characteristics to the company.  I think in this case Moynihan and crew are cutting off their nose a bit to spite their face.  I think they're getting bad advice, but that's from the perspective of an outsider.  I think they would be far better served putting this behind them, even if it means paying a little more and moving on.  I think if Jay Brown is holding the line at $5 bil with little to nothing on the commutations that's another story.  But if, just hypothetically, it's the difference between BAC offering $3.5 bil and MBIA being willing to take $4 bil, they should be able to work that out.

[ERICOPOLY]

I think if Jay Brown is holding the line at $5 bil with little to nothing on the commutations that's another story.

 

 

He (like most people) probably thinks his case against BAC is rock solid.  Follow this thread up to the beginning and count the number of times people say that BAC going in to court for Countrywide is suicide.

 

He's got so much blackmail material.  He rightfully believes BAC will pay a hefty premium to bury the dirty laundry.

 

Why on Earth would he settle for nothing less than 100%....  hence BAC makes this move.

[ShahKhezri]

At the end of the, MBI still holds the cards right? I mean, in a worst case scenario, the investment community thought with their current liquidty, they could stand on their own until sometime in 2014.  Then consent happens and suddenly the community is scared about 2014 coming to 2013 and fear there is bad blood, hence no settlement.

 

In an absolute worst case scenario, Warburg Pincus takes MBI "under" and waits the decision out.  (IMO)

In a screw you BAC from MBI, screw you MBI from BAC situation we'll play this thing out longer, they pay a hefty fee and call the bonds that BAC receives with some sort of bridge loan, the liquidation concerns are mitigated and 2013 comes to 2014.

 

My question is this, Warburg bought $500MM at ~$31/share (16MM shares), and currently owns 46,159,252 shares, and Fairholme owns 44,287,170 shares (source: Factset).  Why wouldn't they protect their equity?  Also, my count including Warburg, Fairholme, Dimensional, London Co. of Virginia, Marathon, Elm Ridge, Jay Brown and Kahn Brothers (we'll call them stable shareholders) is about 135MM shares with 194MM shares o/s. 

 

Me thinks BAC's consent is a joke.  None of what has happened in the last week has changed the true significance of BAC and the R&W. 

 

Let me know where I'm off...