MBI - MBIA Inc.

[ERICOPOLY]

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.

 

#1

I remember when Fairfax needed more money back in 2004 or 2005 they got it, but it was expensive (common equity raise at low price).  And those were how Prem's "friends" treated him (Markel and Southeastern).  Why would Warburg Pincus similarly not make any help expensive?

 

#2

If these bonds get called can BAC just bid on more bonds?  Or is it too late at that point?

 

[Kraven]

#2

If these bonds get called can BAC just bid on more bonds?  Or is it too late at that point?

 

If memory serves, it's probably too late if you're talking about the consent solicitation.  They're bidding on the 2004 bonds which only had a commitment (likely Berkowitz) of something like 3.5%.  The other bonds (1990?) already had something like a 25% commitment so probably not enough out there for BAC to bid it up and block.

[glider3834]

 

good analysis of the case here http://mbibaclitigtion.blogspot.com.au/2012/11/will-mbia-get-summary-judgment-on-bank.html#more

 

Here is an excerpt

 

"The debt consent solicitation/debt tender offer contest has many possible outcomes, but MBIA does possess a "checkmate" move at the end of the game. The notes (2034 notes) that are the subject of the consent solicitation/tender offer contest are prepayable by MBIA at any time.  MBIA will need to make a private placement of at least $330 million of replacement notes (with registration rights) that have a cross-default provision to its liking in order to prepay the 2034 notes, and the prepayment will be costly to MBIA, but the point remains:  MBIA has a pathway to achieve what it wants, the elimination of all holding company debt that cross-defaults to its securitization insurance subsidiary debt."

 

Maybe Fairholme & Warburg Pincus could subscribe to this private placement. MBIA may be waiting to see if BAC achieves their objective of buying the 2034 notes before retaliating. Either way I see it as BAC making a last minute attempt before trial to force a settlement with MBIA and I suspect MBIA will want its day in Court first unless they see a favourable settlement!

 

 

[Kraven]

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.

 

They do in theory.  It's a timing issue.  They need to get from here to there.  The only problem is that BAC is standing in their way and blocking them.  If they make it to the end, they win, but they have to survive to do it.  I think they feel some pressure, but given that the CMBS hasn't deteriorated enough yet to even warrant a claim and we are told the economy is improving, so it could be that they have enough to make it to 2014 and beyond.  The problem will be I think is that once the claims start coming in it will probably be from a lot of them at once.  I doubt it starts with a trickle.  So if things improve, good.  They get in the money from the Countrywide reps case, good.  Otherwise, could be problems.  MBIA has some time to work this all out, but not endless time and they can't wait forever to see what happens as the CMBS are a bit of the sword of damocles hanging high over their head.

[Kraven]

That was quick.  Moody's downgrades.  The chess pieces move a little more.

[onyx1]

MBIA Inc. Recommends Rejection of Unsolicited Note Tender Offer by Bank of America Corporation

 

http://investor.mbia.com/releasedetail.cfm?ReleaseID=722619

 

Yikes, the previous press release had the tone of an 8-year old having a tantrum.  Now this.  If there is any logic as to why a 2004 Bondholder (who doesn't own shares) would suspend their motivation to tender after reading this, I don't see it.  After careful consideration of the facts,  MBIA has determined that 2004 Bondholders should not reap a windfall and sell their bonds at par because (1) MBIA policyholders will be hurt, and (2) it will be detrimental to remaining bondholders.  Yeah right!  MBIA is starting to look desperate.

 

 

[ERICOPOLY]

Yeah right!  MBIA is starting to look desperate.

 

So is Berkowitz IMO.  Why is he giving up his vote so easy?  Better move is to make MBIA pay him a premium to call his bonds if he wants his vote.  Then, when MBIA needs to raise common equity, buy it from them really cheap.

 

Then again... this is me talking and I'll defer to a better investor.  Berkowitz.

[Grenville]

The downgrade looks like it is shaking loose more volume on the 2034 5.7% notes. 4mln today near par.

[Aberhound]

[bOAs conduct with the offer above fair value to harm MBIA has the appearance of Conrad Black removing boxes from his office at night. Even if entirely legal it looks like BOA knows something that causes them to be desperate to avoid trial.

 

Trials are won or lost on the facts and this is the type of fact that litigators dream about, especially when it happens on the eve of trial./b]

[ShahKhezri]

Let's just go back to the basic question here because I think the consent is just noise.  Will a judge not rule on something that would/could/may very well put a company in receivership?

 

Brown is an attorney, the idea that they did this consent without thinking that BAC would do their own is ludicrous.  We're not talking about some fresh out of law school attorney's here.  The whole point was for the judge to find some urgency.  If BAC gets 51%, MBI within 6 months goes ch. 7, this would be a complete joke to the court system seeing as how the judge has waited out this whole thing just so the two parties could settle.  Well, they haven't, instead they have 

 

And by the way, I'm not talking my book, with the exception of FAAFX exposure to MBI, my position in BAC outweights MBI many times over.  I'm thinking of buying call options though seeing as how a 2-3BN net settlement is 150%+ of equity right now.

[ERICOPOLY]

The whole point was for the judge to find some urgency. 

 

Urgency in what respect?

 

Do you mean with regards to the ruling on the Article 78?

 

The judge cannot rule on that until there is a monetization of the legal receivable.  It's too big of an asset on the balance sheet.

 

Who really believes that a judge can speculate on the outcome of another trial that hasn't even gone to court yet?  Wouldn't that be viewed by peers as grossly unprofessional?

[Kraven]

MBIA Inc. Recommends Rejection of Unsolicited Note Tender Offer by Bank of America Corporation

 

http://investor.mbia.com/releasedetail.cfm?ReleaseID=722619

 

Yikes, the previous press release had the tone of an 8-year old having a tantrum.  Now this.  If there is any logic as to why a 2004 Bondholder (who doesn't own shares) would suspend their motivation to tender after reading this, I don't see it.  After careful consideration of the facts,  MBIA has determined that 2004 Bondholders should not reap a windfall and sell their bonds at par because (1) MBIA policyholders will be hurt, and (2) it will be detrimental to remaining bondholders.  Yeah right!  MBIA is starting to look desperate.

 

They telegraphed in the press release that they will be initiating legal action in response.  So great, another lawsuit between MBIA and BAC.  That's the way to get things moving ahead.  I am sure they will first seek a temporary restraining order on BAC.  Probably can't get that.  They are likely contacting any regulator they can think of to complain.  At some point the judges are going to call them in, scream at them and tell them they aren't leaving until they work something out.

 

I actually don't see it as MBIA looking desperate so much as extremely petulant.  To me they clearly believe they have a winning case and are doing whatever they can to preserve that.  The problem is you can win the battle, but lose the war.  I continue to maintain that both sides are getting very poor advice, although it may be for all I know that they are getting good advice but ignoring it.  I have a very hard time believing that MBIA advisors are telling them to hold out for the maximum possible award and nothing else and also that BAC's advisors are telling them to play hardball and not put this behind them.  Very strange all around.

[Cardboard]

"Callable anytime at the greater of 100.00 or the present value of the remaining scheduled payments of principal and interest."

 

They can call these bonds from BAC or the current holders to get out of it, but they have no cash and what is the NPV? What rate do you use? At 5.7% or the nominal yield on the bond you obviously get $329 million, but if you use a lower rate based on today's interest rate, the amount goes up a fair bit.

 

Cardboard

[ShahKhezri]

The whole point was for the judge to find some urgency. 

 

Urgency in what respect?

 

Do you mean with regards to the ruling on the Article 78?

 

The judge cannot rule on that until there is a monetization of the legal receivable.  It's too big of an asset on the balance sheet.

 

Who really believes that a judge can speculate on the outcome of another trial that hasn't even gone to court yet?  Wouldn't that be viewed by peers as grossly unprofessional?

 

You're right.  That's my point.  MBIA thinks they have a winning case, BAC knows they have to pay but they disagree on the amount.  The judge obviously can't make a decision, tons of money spend on lawyers...

[ERICOPOLY]

The whole point was for the judge to find some urgency. 

 

Urgency in what respect?

 

Do you mean with regards to the ruling on the Article 78?

 

The judge cannot rule on that until there is a monetization of the legal receivable.  It's too big of an asset on the balance sheet.

 

Who really believes that a judge can speculate on the outcome of another trial that hasn't even gone to court yet?  Wouldn't that be viewed by peers as grossly unprofessional?

 

You're right.  That's my point.  MBIA thinks they have a winning case, BAC knows they have to pay but they disagree on the amount.  The judge obviously can't make a decision, tons of money spend on lawyers...

 

Winning a case against Countrywide for $5b award is different from Countrywide having the money to pay them.

 

Does Jay Brown really have the balls to risk a "piecing the veil" decision?

 

This is where he then decides to get the consent of the bondholders.

 

He can threaten and bluff and whatever, but BAC maybe doesn't believe his threats given that risk. 

 

So they block his maneuver buy buying these bonds -- make sure Jay Brown remembers that he has skin of his own in this game.

[ERICOPOLY]

So this is a possibility (speculating of course):

 

Both MBI's and BAC's legal counsel are advising their respective clients that piercing the veil is most probably ruled in BAC's favor.

 

Thus, perhaps the only issue remaining is this bond consent issue.

 

The tone of MBI's response so far reminds me of a song:

 

He said, "Son, I've made my life out of readin' people's faces,

And knowin' what their cards were by the way they held their eyes.

So if you don't mind my sayin', I can see you're out of aces.

For a taste of your whiskey I'll give you some advice."

 

[ERICOPOLY]

More to that point...

 

BAC earlier released a legal opinion that they had paid for.  It said that BAC would most likely win a piercing the veil decision.  Perhaps that was a message not to MBI, but rather a message to BAC's shareholders.

 

MBI has almost certainly also paid for an opinion, but they have not yet (as far as I'm aware) disclosed what it said.

 

Separately, Moynihan disclosed to the press (or so it was reported) that he had thought about putting Countrywide into bankrupcy but decided against it due to the harm it might bring to their reputation.  Well, perhaps in blocking the bond consent issue it's a signal that now he's serious and willing to go that step.

[glider3834]

For disclosure I hold BAC & MBIA positions

 

Ericopoly, I would also add their reputation & their credit ratings on all BAC debt.

 

I think it is too late for BAC to separate COuntrywide from BAC , if you read up on how it was structured and the way in which Countrywide's operation was effectively integrated into BAC - they are now one & the same business- if you put COuntrywide into bankruptcy then BAC's credit ratings would be affected and that would do far more damage than BAC going ahead & settling these claims. IF BAC was going to put Countrywide into bankruptcy they would have done it a long time ago.

 

I think BAC will lose the R&W litigation next month- I have read teh arguments & the case law & recent judgements are absolutely in MBIA's favour - I think BAC is trying through the consent solicitation to get a settlement done before 5th December when they are due to go to Court. BAC is going to lose & while they might appeal - if MBIA receives a 4bil plus judgement - they will have upper hand in any further settlement negotiation plus the regulators will likely provide MBIA Corp with more favourable eyes.

 

Even if MBIA loses the Article 78 litigation the R&W litigation is the key one - personally I don't think any judge would say that for the NY Insurance Commission separating two entities in the way it was done to ensure the survival of the entire munipal bond industry was a misuse of power. Rather I think the NY Insurance Dept was doing their job. But I guess we will see.

 

[glider3834]

sorry that last sentence second para I meant "look on MBIA corp with more favourable eyes"

[Telluride]

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.

 

#1

I remember when Fairfax needed more money back in 2004 or 2005 they got it, but it was expensive (common equity raise at low price).  And those were how Prem's "friends" treated him (Markel and Southeastern).  Why would Warburg Pincus similarly not make any help expensive?

 

#2

If these bonds get called can BAC just bid on more bonds?  Or is it too late at that point?

 

 

I think Warburg has to be careful of throwing good money after bad, particularly since they are out fundraising today. They did the original deal on about 5 days of due diligence which obviously was an enormous mistake that they did not fully understand the company, the economy, etc. The only way they can put more money in is if they are convinced it is money good. This isn't a public investor used to cost averaging down for a 2-3% position. They have to call capital from LPs and make the case for why they are doing it. If I were there, I would want to be 100% certain my additional capital fixes everything. But how do you get that comfort? You are open to legal risk (lawsuits, plenary action, article 78), regulatory risk (regulators have already let a lot slide in the split, the selective relief from minimum capital levels, etc and have shown signs of fatigue - did not approve bonuses last year, delay in approving surplus notes payments, could call this game at any point), business risk (is there even a business / market here if it was all said and done, and what level of dilution would S&P/Moody's have them undergo to actually be able to write new business again). I'm sure the guys on the deal want to fund this and keep it going, but if I am running the fund and out raising capital, this would be hard.

[Telluride]

For disclosure I hold BAC & MBIA positions

 

Ericopoly, I would also add their reputation & their credit ratings on all BAC debt.

 

I think it is too late for BAC to separate COuntrywide from BAC , if you read up on how it was structured and the way in which Countrywide's operation was effectively integrated into BAC - they are now one & the same business- if you put COuntrywide into bankruptcy then BAC's credit ratings would be affected and that would do far more damage than BAC going ahead & settling these claims. IF BAC was going to put Countrywide into bankruptcy they would have done it a long time ago.

 

I think BAC will lose the R&W litigation next month- I have read teh arguments & the case law & recent judgements are absolutely in MBIA's favour - I think BAC is trying through the consent solicitation to get a settlement done before 5th December when they are due to go to Court. BAC is going to lose & while they might appeal - if MBIA receives a 4bil plus judgement - they will have upper hand in any further settlement negotiation plus the regulators will likely provide MBIA Corp with more favourable eyes.

 

Even if MBIA loses the Article 78 litigation the R&W litigation is the key one - personally I don't think any judge would say that for the NY Insurance Commission separating two entities in the way it was done to ensure the survival of the entire munipal bond industry was a misuse of power. Rather I think the NY Insurance Dept was doing their job. But I guess we will see.

 

Do you think the notion that MBIA is seeking consent to effectively let MBIA Corp go proves or disproves the point that there has been fraudulent conveyance...stripping corp policyholders of security to save National? Thinking more about the plenary action than the article 78 hearing.

[Telluride]

For disclosure I hold BAC & MBIA positions

 

Ericopoly, I would also add their reputation & their credit ratings on all BAC debt.

 

I think it is too late for BAC to separate COuntrywide from BAC , if you read up on how it was structured and the way in which Countrywide's operation was effectively integrated into BAC - they are now one & the same business- if you put COuntrywide into bankruptcy then BAC's credit ratings would be affected and that would do far more damage than BAC going ahead & settling these claims. IF BAC was going to put Countrywide into bankruptcy they would have done it a long time ago.

 

I think BAC will lose the R&W litigation next month- I have read teh arguments & the case law & recent judgements are absolutely in MBIA's favour - I think BAC is trying through the consent solicitation to get a settlement done before 5th December when they are due to go to Court. BAC is going to lose & while they might appeal - if MBIA receives a 4bil plus judgement - they will have upper hand in any further settlement negotiation plus the regulators will likely provide MBIA Corp with more favourable eyes.

 

Even if MBIA loses the Article 78 litigation the R&W litigation is the key one - personally I don't think any judge would say that for the NY Insurance Commission separating two entities in the way it was done to ensure the survival of the entire munipal bond industry was a misuse of power. Rather I think the NY Insurance Dept was doing their job. But I guess we will see.

 

FWIW, I agree that MBIA has merit in its case and BAC ultimately pays if still liquid to see that day. Recent judgements too favorable. Still a question of what they get vs. what they owe. BAC sees value to settling, but think the economics point to a lower # than MBIA wants/needs to get back in business given the CMBS issue. MBIA doesn't have flexibility to accept a lower number. I keep hearing they are $1B apart on negotiations with BAC willing to pay $1B net, but with MBIA demanding $2B. For those who still reference $5B, that is the full amount MBIA has lost on RMBS which includes issues u/w by Rescap (in bankruptcy) and others. And ignores the fact that MBIA owns BAC money on CMBS. MBIA needs atleast $1.5B to repay the National loan and has booked all of the higher number plus some into equity as they have assumed a lot more in recoveries than they have reserved for CMBS exposure.

[valuecfa]

What is mbia worth if it settles with bac for only a smaller amount than they would like and retains the ability to split the company. I think downside is not as severe as market reaction and headlines would have u believe. Mbia wants a large settlement but it still has an out with a low settlement figure even if not enough to fully cover cross loan if split is maintained. Given language I have heard from Bac, they would be happy to settle at the right price(of course a lower price than mbia would like)

[Kraven]

For disclosure I hold BAC & MBIA positions

 

Ericopoly, I would also add their reputation & their credit ratings on all BAC debt.

 

I think it is too late for BAC to separate COuntrywide from BAC , if you read up on how it was structured and the way in which Countrywide's operation was effectively integrated into BAC - they are now one & the same business- if you put COuntrywide into bankruptcy then BAC's credit ratings would be affected and that would do far more damage than BAC going ahead & settling these claims. IF BAC was going to put Countrywide into bankruptcy they would have done it a long time ago.

 

I think BAC will lose the R&W litigation next month- I have read teh arguments & the case law & recent judgements are absolutely in MBIA's favour - I think BAC is trying through the consent solicitation to get a settlement done before 5th December when they are due to go to Court. BAC is going to lose & while they might appeal - if MBIA receives a 4bil plus judgement - they will have upper hand in any further settlement negotiation plus the regulators will likely provide MBIA Corp with more favourable eyes.

 

Even if MBIA loses the Article 78 litigation the R&W litigation is the key one - personally I don't think any judge would say that for the NY Insurance Commission separating two entities in the way it was done to ensure the survival of the entire munipal bond industry was a misuse of power. Rather I think the NY Insurance Dept was doing their job. But I guess we will see.

 

Do you think the notion that MBIA is seeking consent to effectively let MBIA Corp go proves or disproves the point that there has been fraudulent conveyance...stripping corp policyholders of security to save National? Thinking more about the plenary action than the article 78 hearing.

 

In my view, neither.  The whole plenary action is kind of strange to me.  In order to have a fraudulent conveyance the party transferring the assets needs to have become bankrupt or effectively insolvent.  That's the argument BAC has made, that it rendered MBIA Corp insolvent.  However, years have passed and they certainly haven't filed or gone through any insolvency proceedings.  So the only question is whether they were effectively insolvent at the time.  Note too that even if it is conceded for sake of argument that they were insolvent what happens now should have no bearing on whether it was a fraudulent conveyance at the time.  For that they either need to prove some kind of intent to defraud or that based on the economics at the time that there was some kind of constructive fraud.  Rarely is there going to be a smoking gun so a court will need to look for indicia of fraud.  Certainly whether a party went bankrupt soon after would be one of those, but 3-4 years later?  And they're not even insolvent.  I am not an expert in this area by any means, so if someone is please weigh in.

[Kraven]

Further to my point above.  Many like to say that MBIA Corp is effectively insolvent by pointing to the $375 mil or so of liquidity and the billions in possible claims on the CMBS.  But that isn't correct.  There isn't even an incipient claim here.  By this definition basically every insurance company would be insolvent as it would impossible to pay all claims if they came due.  According to MBIA and not disputed by anyone that I've seen, while the CMBS has deteriorated there are no claims imminent and nothing material has been paid in the past.  It would seem as if an assumption is being made that deterioration to date will continue, but even if so they likely would not be overwhelmed by claims until 2014.  I don't see how actually MBIA loses the Article 78 or plenary matters.  Under the Article 78 matter plaintiffs need to show that the commissioner effectively went off the reservation.  A tall order.  In terms of the plenary matter, I've discussed my thoughts on it.