MBI - MBIA Inc.

[Kraven]

MBIA finally files an 8-k:

 

http://www.sec.gov/Archives/edgar/data/814585/000115752312006394/a50510544.htm

 

and some good commentary on putback litigation progress:

 

http://www.subprimeshakeout.com/2012/12/five-signs-plaintiffs-winning-rmbs-war.html

 

It's interesting.  The BAC notice of default actually has less to it than I would have thought.  There are 2 claims:  one that MBIA "beneficially" owned the bonds, thus they would be excluded from being able to vote in favor of the consent and, two, that MBIA has breached a covenant.  Not a covenant actually in the agreement, but the implied covenant of good faith and fair dealing. 

 

On the first part, I think it's a stretch to say that MBIA beneficially owned the bonds.  Unless they were lying, they stated that each seller approached them about buying it.  So reverse inquiry.  Clearly MBIA said sure, we're interested but we're only going to buy bonds that have been voted in favor of the consent.  The seller is free to do or not do whatever it chooses.  There is no coercion, these aren't indigent individuals who have no choices in life.  So the seller did what it wanted to do, voted in favor and then sold the bond.  This isn't a slam dunk for MBIA in my view as I could see a judge having some issues here, but it is common practice in the finance world to "pay" for votes in this manner.  There are plenty of amendments and such where a fee is only paid if the holder votes affirmatively.

 

In terms of the second part, whether there is a breach of the implied covenant of good faith and fair dealing, that's going to be very difficult for BAC to win on.  This covenant certainly exists in any commercial contract, but in order to prove lack of good faith means to essentially prove dishonesty.  For fair dealing it would mean proving that MBIA acted in a manner that was unfair and not in accordance with the general standards of the business world.  I think they would have to prove that MBIA's actions were so far out there as to be unacceptable.  I don't see how this is really possible.  As noted above it is common practice to pay for consents.  Additionally, MBIA didn't offer a "consent" fee to some holders that wasn't offered to others.  They bought back the bond!  BAC is saying that whatever premium paid is a consent fee I suppose, but there is no rule against buying bonds back at a premium.  Given that this was reverse inquiry, there was no reason anything else had to be offered to anyone.

 

I suspect though this thread will continue until we're all old and grey. 

[Kraven]

It just occured to me that after the bond solicitation, National's adjusted book value dropped from $25 to something like $18 after taking on those 900 Million bonds. Am I right?

It is still a good value, but just a reminder to folks about this.

 

The bonds are not obligations of National.  They are debt of MBIA Inc, the parent company.  Nothing has changed about the debt itself.  The only change was a contractual provision dealing with cross defaults.

[valuecfa]

 

I suspect though this thread will continue until we're all old and grey.

 

lol. I suspect it won't be as long as it seems, but it's certainly taking longer than I originally thought.

[muscleman]

It just occured to me that after the bond solicitation, National's adjusted book value dropped from $25 to something like $18 after taking on those 900 Million bonds. Am I right?

It is still a good value, but just a reminder to folks about this.

 

The bonds are not obligations of National.  They are debt of MBIA Inc, the parent company.  Nothing has changed about the debt itself.  The only change was a contractual provision dealing with cross defaults.

 

Oh, Sorry. I thought MBIA inc is the strucutural finance sub. Looks like that one is MBIA corp.

 

Yes you are right. This doesn't affect the book value of national.

I am evaluating the worst case scenario because I am thinking of adding to 15% of my portfolio.

Do you think MBIA has sufficient liquidity to fight through the end? If the judge rules in 2013 and BAC appeals, can MBIA survive another 3 years?

I know that national lent MBIA inc. 1.6 billions for liquidity and some contract commutation. The collateral is the R&W claims in MBIA corp. So even if MBIA corp goes to chapter 11, the fight will still continue unless National goes down as well, which seems very unlikely, right?

[Kraven]

It just occured to me that after the bond solicitation, National's adjusted book value dropped from $25 to something like $18 after taking on those 900 Million bonds. Am I right?

It is still a good value, but just a reminder to folks about this.

 

The bonds are not obligations of National.  They are debt of MBIA Inc, the parent company.  Nothing has changed about the debt itself.  The only change was a contractual provision dealing with cross defaults.

 

Oh, Sorry. I thought MBIA inc is the strucutural finance sub. Looks like that one is MBIA corp.

 

Yes you are right. This doesn't affect the book value of national.

I am evaluating the worst case scenario because I am thinking of adding to 15% of my portfolio.

Do you think MBIA has sufficient liquidity to fight through the end? If the judge rules in 2013 and BAC appeals, can MBIA survive another 3 years?

I know that national lent MBIA inc. 1.6 billions for liquidity and some contract commutation. The collateral is the R&W claims in MBIA corp. So even if MBIA corp goes to chapter 11, the fight will still continue unless National goes down as well, which seems very unlikely, right?

 

No one can answer your questions in a way that will give you the comfort you seek.  This is a complicated situation requiring understanding of legal strategy and business politics.  That and around $4 will get you a venti coffee at Starbucks. You should only invest in things that allow you to sleep at night.

 

Does MBIA have sufficient liquidity to fight until the end?  Who knows.  What's sufficient and what's the end? 

 

In terms of whether MBIA can survive another 3 years, I have no idea where you're getting the 3 years from.  I vaguely recall another poster using that time frame, but I think it was used in a "it's a long time" context.  No one knows how long it will take.  We might get a settlement before I even finish typing this and we might have a legal battle that stretches on until the earlier of MBIA running out of money, pigs flying and an MBIA favorable ruling.  Don't have any expectations on the length of the matter.  Hope for the best, expect the worst.  Legal battles can go on for very long times if the parties want them too. 

 

In terms of the money lent from National to MBIA Corp, make sure you understand the situation.  There is no collateral as this is not a secured loan.  I'd have to look at that, but I don't believe it is.  Certainly any recovery that comes is what they are looking at for repayment, secured or unsecured.  I have no idea how likely or not it is that National would go under.  I certainly don't think so or I wouldn't be invested in the stock.  But regardless of what happens with MBIA, the litigation will continue it's just that it would be regulators or some kind of proxy for them fighting the case.  Neither you nor I would care at that point though, it would just be a matter of getting maximum funds to pay policies, etc.

 

Hope this helps.

[bmichaud]

I'm sure everyone has already read this stuff, but in my recent MBI catch-up reading I've compiled the two lawyer blogs noted on here into PDFs in case anyone is interested.

MBIA_Herzeca_Blog_Oct_8_-_Dec_13.pdf

Subprime_Shakeout_Posts_July_2012-December_2012.pdf

[JRH]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

[muscleman]

It just occured to me that after the bond solicitation, National's adjusted book value dropped from $25 to something like $18 after taking on those 900 Million bonds. Am I right?

It is still a good value, but just a reminder to folks about this.

 

The bonds are not obligations of National.  They are debt of MBIA Inc, the parent company.  Nothing has changed about the debt itself.  The only change was a contractual provision dealing with cross defaults.

 

Oh, Sorry. I thought MBIA inc is the strucutural finance sub. Looks like that one is MBIA corp.

 

Yes you are right. This doesn't affect the book value of national.

I am evaluating the worst case scenario because I am thinking of adding to 15% of my portfolio.

Do you think MBIA has sufficient liquidity to fight through the end? If the judge rules in 2013 and BAC appeals, can MBIA survive another 3 years?

I know that national lent MBIA inc. 1.6 billions for liquidity and some contract commutation. The collateral is the R&W claims in MBIA corp. So even if MBIA corp goes to chapter 11, the fight will still continue unless National goes down as well, which seems very unlikely, right?

 

No one can answer your questions in a way that will give you the comfort you seek.  This is a complicated situation requiring understanding of legal strategy and business politics.  That and around $4 will get you a venti coffee at Starbucks. You should only invest in things that allow you to sleep at night.

 

Does MBIA have sufficient liquidity to fight until the end?  Who knows.  What's sufficient and what's the end? 

 

In terms of whether MBIA can survive another 3 years, I have no idea where you're getting the 3 years from.  I vaguely recall another poster using that time frame, but I think it was used in a "it's a long time" context.  No one knows how long it will take.  We might get a settlement before I even finish typing this and we might have a legal battle that stretches on until the earlier of MBIA running out of money, pigs flying and an MBIA favorable ruling.  Don't have any expectations on the length of the matter.  Hope for the best, expect the worst.  Legal battles can go on for very long times if the parties want them too. 

 

In terms of the money lent from National to MBIA Corp, make sure you understand the situation.  There is no collateral as this is not a secured loan.  I'd have to look at that, but I don't believe it is.  Certainly any recovery that comes is what they are looking at for repayment, secured or unsecured.  I have no idea how likely or not it is that National would go under.  I certainly don't think so or I wouldn't be invested in the stock.  But regardless of what happens with MBIA, the litigation will continue it's just that it would be regulators or some kind of proxy for them fighting the case.  Neither you nor I would care at that point though, it would just be a matter of getting maximum funds to pay policies, etc.

 

Hope this helps.

 

Thank you Karen.

I want to focus more on the downside than the upside, because who knows when they will settle. For the downside, Bruce Birkowitz said there is barely any downside, and I am curious to understand why.

The legal battle can theoratically last another 3 years, if the judge rules and BAC appeals. It is unclear if they really want to appeal instead of settlement though.

I don't think BAC would like to continue to pay a reasonable amount to settle now until it gets the unfavourable ruling.

 

Regarding National secured loan, below is copied from the latest 10-Q. I think this one, as well as the bond modification pretty much limits the downside for this investment. So I really would like to know, what other events will increase the downside?

 

I invested some into MBIA, and I can sleep at night, but I always want to learn more about the downside. In the past, I made mistakes on other investments by ignoring the downside and day-dreaming how much I could make when the upside is realized. I got burned doing that. So now I change to the opposite. Only look at the downside, learn it day after day, and let the upside takes care of itself.

 

------------

National Secured Loan

 

National provided a $1.1 billion secured loan to MBIA Insurance Corporation (“National Secured Loan”) in order to enable MBIA Insurance Corporation to fund settlements and commutations of its insurance policies. This loan was approved by the NYSDFS as well as by the boards of directors of MBIA Inc., MBIA Insurance Corporation and National. The National Secured Loan has a fixed annual interest rate of 7% and a maturity date of December 2016. MBIA Insurance Corporation has the option to defer payments of interest when due by capitalizing interest amounts to the loan balance, subject to the collateral value exceeding certain thresholds. MBIA Insurance Corporation has elected to defer the interest payments due under the loan. MBIA Insurance Corporation’s obligation to repay the loan is secured by a pledge of collateral having an estimated value in excess of the notional amount of the loan as of September 30, 2012, which collateral comprised the following future receivables of MBIA Corp.: (i) its right to receive put-back recoveries related to ineligible mortgage loans included in its insured second-lien RMBS transactions; (ii) future recoveries on defaulted insured second-lien RMBS transactions resulting from expected excess spread generated by performing loans in such transactions; and (iii) future installment premiums. During the nine months ended September 30, 2012, MBIA Insurance Corporation borrowed an additional $443 million under the National Secured Loan with the approval of the NYSDFS at the same terms as the original loan to fund additional commutations of its insurance policies. As of September 30, 2012, the outstanding principal amount under this loan was $1.6 billion. MBIA Insurance Corporation may seek to borrow additional amounts under the loan in the future. Any such increase or other amendment to the terms of the loan would be subject to regulatory approval by the NYSDFS.

 

 

[bmichaud]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

[muscleman]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

I am unable to open that link as I am traveling abroad.

Can a company really decline to give SEC whatever info they requests?

[valuecfa]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

[muscleman]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

 

So can a public company refuse to cooperate with SEC investigation? Why does MBIA refuse to give SEC data?

[valuecfa]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

 

So can a public company refuse to cooperate with SEC investigation? Why does MBIA refuse to give SEC data?

 

Direct quote from the article above:

 

MBIA declined, saying disclosing that would impact settlements with other counterparties.

 

“We would only disclose loss reserve or recovery balances, or changes thereto, related to specific counterparties if we deem such disclosures to be meaningful to investors, as such disclosures may have an adverse effect on our ability to negotiate settlements of such balances with counterparties,” MBIA Chief Financial Officer Chuck Chaplin said in an Oct. 26 letter.

[muscleman]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

 

So can a public company refuse to cooperate with SEC investigation? Why does MBIA refuse to give SEC data?

 

Direct quote from the article above:

 

MBIA declined, saying disclosing that would impact settlements with other counterparties.

 

“We would only disclose loss reserve or recovery balances, or changes thereto, related to specific counterparties if we deem such disclosures to be meaningful to investors, as such disclosures may have an adverse effect on our ability to negotiate settlements of such balances with counterparties,” MBIA Chief Financial Officer Chuck Chaplin said in an Oct. 26 letter.

 

Thanks a lot! I am abroad right now and I couldn't open that above link.

[Kraven]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

 

Agreed.  This didn't strike me as anything out of the ordinary.  The accounting staff is looking into reserves, etc.  They requested info that MBIA refused to provide.  The fact that MBIA isn't be compelled to provide it means that it's likely a non-issue.  If there was truly something troubling the SEC they would have legally compelled MBIA to provide it.  One line that people seemed to get heartburn about was the part where it said they reserve their rights to do something in the future.  Standard stuff that is in any kind of correspondence of this sort.  Doesn't mean that something won't happen in the future.  Who knows, but it hasn't reached any kind of danger signal as of now based on the information that came out.

 

[valuecfa]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

Agreed.  This didn't strike me as anything out of the ordinary.  The accounting staff is looking into reserves, etc.  They requested info that MBIA refused to provide.  The fact that MBIA isn't be compelled to provide it means that it's likely a non-issue.  If there was truly something troubling the SEC they would have legally compelled MBIA to provide it.  One line that people seemed to get heartburn about was the part where it said they reserve their rights to do something in the future.  Standard stuff that is in any kind of correspondence of this sort.  Doesn't mean that something won't happen in the future.  Who knows, but it hasn't reached any kind of danger signal as of now based on the information that came out.

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

 

Info was provided to the SEC...just not to public

[Kraven]

Not my favorite sort of news item to see on a company I'm invested in.  To take liberty with a Buffett quote, surprises involving the SEC are almost invariably bad:

 

http://www.bloomberg.com/news/2012-12-18/mbia-declined-to-give-sec-requested-gmac-valuation-information.html

 

I don't see how this is bad fundamentally. The market is more than discounting MBI not receiving a dime of insurance recoveries....

 

Agreed.  This didn't strike me as anything out of the ordinary.  The accounting staff is looking into reserves, etc.  They requested info that MBIA refused to provide.  The fact that MBIA isn't be compelled to provide it means that it's likely a non-issue.  If there was truly something troubling the SEC they would have legally compelled MBIA to provide it.  One line that people seemed to get heartburn about was the part where it said they reserve their rights to do something in the future.  Standard stuff that is in any kind of correspondence of this sort.  Doesn't mean that something won't happen in the future.  Who knows, but it hasn't reached any kind of danger signal as of now based on the information that came out.

 

A non-headline in my opinion. SEC looked into BAC's reserve practices regarding litigation...and they looked at MBIA's. And I'm sure plenty of other company's reserves that are involved in large putback battles.

 

Info was provided to the SEC...just not to public

 

I see.  Bloomberg changed that aspect of the story this morning.  I hadn't seen that yet.  Doesn't change my views at all.  In fact makes it better that they did provide what the SEC wants.  They don't need to publicly disclose it.

[ShahKhezri]

Inc.'s 5Y CDS have remained relatively flat this week, but Insurance Corp. 5Y CDS spiked this week...what do you think is happening?

 

Is MBIA going through with the rehabilitation of Insurance Corp?

 

[muscleman]

Inc.'s 5Y CDS have remained relatively flat this week, but Insurance Corp. 5Y CDS spiked this week...what do you think is happening?

 

Is MBIA going through with the rehabilitation of Insurance Corp?

 

Could you please post a screenshot of it? I am travelling outside of US and I couldn't access bloomberg.

 

My guess is that BAC bought most of these CDS. MBIA is like:"We are not afraid of putting MBIA Corp. into rehabilitation after the bond modification. Now we have significant negotiation leverage." And BAC is like:"Really? Then we have to load up with your CDS so that we are not afraid of your putting MBIA Corp. into rehabilitation either. Now what is your negotiation leverage?"

 

That is merely my wild guess. Anyone has other thoughts? :)

[JRH]

My guess is that BAC bought most of these CDS. MBIA is like:"We are not afraid of putting MBIA Corp. into rehabilitation after the bond modification. Now we have significant negotiation leverage." And BAC is like:"Really? Then we have to load up with your CDS so that we are not afraid of your putting MBIA Corp. into rehabilitation either. Now what is your negotiation leverage?"

 

That is merely my wild guess. Anyone has other thoughts? :)

 

CDS prices rising on MBIA Corp could be two things, as I see it.  One, they believe something has meaningfully happened in the market that has hurt MBIA Corp's prospects, specifically.  More likely, it could be a sign that the market believes MBIA's (parent) attempt to ring-fence MBIA Corp will be (or has been) successful, such that MBIA Corp. will be materially more likely to put it into bankruptcy.  If the market deemed the ring-fencing likely to fail, you would expect to see the CDS prices of MBIA Corp. and MBIA (parent) converge.

[ShahKhezri]

Right, agreed.  Interesting that they moved up this much this week.  The consent happened two weeks ago.

[muscleman]

Right, agreed.  Interesting that they moved up this much this week.  The consent happened two weeks ago.

 

So that is why I think probably the major CDS buyer is BAC. They first tried to sue MBIA for illegal bond modification. They started suing before doing the due diligence. Then they found out that there is actually no way to win this suit and reverse the bond modification, and then they started buying the CDS.

[muscleman]

Guys, it is approaching year end but the president still hasn't completed solution for the debt debate and tax hikes.

If they fail to address this, and the municipal bond is no longer tax-exempt, then the muni bond price will tank.

Do MBIA and AGO need to post colleterals for this situation, or take some non-cash accounting charges? I doubt if that happens, the balance sheet of these two can look ugly.

[vinod1]

Guys, it is approaching year end but the president still hasn't completed solution for the debt debate and tax hikes.

If they fail to address this, and the municipal bond is no longer tax-exempt, then the muni bond price will tank.

Do MBIA and AGO need to post colleterals for this situation, or take some non-cash accounting charges? I doubt if that happens, the balance sheet of these two can look ugly.

 

My understanding is that MBIA/AGO only provides protection against default not on market prices. So if muni bonds are no longer tax exempt they drop in price - similar to what would happen if interest rates rise suddenly. So MBIA/AGO would not be affected by this directly.

 

Vinod

[JRH]

Retention bonuses for top execs:

 

http://sec.gov/Archives/edgar/data/814585/000115752312006474/a50516845.htm

 

Then this:

 

http://www.bloomberg.com/news/2012-12-27/mbia-insurance-regulator-criticizes-retention-bonuses-correct-.html

 

I understand there is bonus hysteria around regulated financial institutions but what do they think will happen to these companies if their key personnel leave?  Will it be good for the prospects of MBIA Corp.?  The holding company?  What about policyholders/counterparties?  The Muni market?

 

Etc, etc...