MBI - MBIA Inc.

[valuecfa]

Thanks was really looking for an update. This is still on my research list and I plan to get to it right after Q4 updates.

 

Sure. I'm very excited about this company. These commutations are really speeding up the realization of anticipated book value, while simultaneously removing a good deal of the riskiest transactions, and near term payouts. If the split is upheld this year, the commutations will come much more quickly, hopefully before continued large reversals in unrealized mark to market losses revert to more substantial gains. I think the market is vastly overestimating losses on the structured finance transactions, through their current marks to market. If the company recovers the full value of expected putback claims (nevermind fraud, damages, and other claims) and the split is upheld, which i still view as both likely events, than this company will be several multiples of where it is right now.

[Myth465]

There arent enough hours in the day. This is near the top of my research list after updating my stocks. Pretty much tapped out of cash but between you and Berkowitz this seems like a well priced bet. I am sure I can find some somewhere. The leaps have also cooled off a bit which is nice. Hopefully there are a few more down days. I should have time next week to dig in.

 

This reminds me of Capital One for Cornwall capital a bit.

[ERICOPOLY]

Thanks was really looking for an update. This is still on my research list and I plan to get to it right after Q4 updates.

If the company recovers the full value of expected putback claims (nevermind fraud, damages, and other claims) and the split is upheld, which i still view as both likely events, than this company will be several multiples of where it is right now.

 

That scenario will earn you my vote for favorite board poster.  I used the recent price weakness to buy.

 

 

[zippy1]

Found this old piece by Thomas Brown explaining the adjusted book value used by MBIA.

 

http://www.istockanalyst.com/article/viewarticle/articleid/2531848

 

I am wondering whether the adjusted book value should be used an approximation for intrinsic value.

[zippy1]

Found this old piece by Thomas Brown explaining the adjusted book value used by MBIA.

 

http://www.istockanalyst.com/article/viewarticle/articleid/2531848

 

I am wondering whether the adjusted book value should be used an approximation for intrinsic value.

 

Here is a short thesis.http://seekingalpha.com/article/232568-on-branch-hill-s-mbia-report

[Myth465]

Thanks Zippy.

[stahleyp]

anyone know if Einhorn is still short this?

[valuecfa]

I just thought i should mention that there is chatter of a PE deal in the works.

[valuecfa]

In the spirit of keeping the thread updated with new info. until the investment thesis plays out...

 

The banks have presented their case with their largest contribution being the (paid)affidavits of former insurance superintendents, and the files have been posted to the SCROLL court system. I won't post all the exhibits and affidavits, but here is one of them (they are fairly similar in substance):

https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=tirVQewp3Wu37/CRWCZpHw==&system=prod

 

MBIA will present their defense over the next month or two. The judge will rule on whether there will be a trial in July, according to the current time line.

 

 

I found this video as well that discusses the Fairholme Fund's due diligence process on MBIA's legal battles, as well as how it tries to get an informational arbitrage by an outsourcing method that is fairly unique to the mutual fund mgmt. business. It helps to have over $20 Billion in AUM.

http://www.morningstar.com/cover/videocenter.aspx?id=373370

[txlaw]

Thanks in advance for keeping the info coming, valuecfa.

[ERICOPOLY]

As an estimate of the success rate of monolines getting putbacks on these securities BAC provides the following opposite perspective.  To Sept. 30, 2010 4.8 B in claims had been received by BAC-C-wide.  2.7 B had been reviewed and rejected; 1.5 B were still under review; and 0.6 B had been repurchased.  From this I get that 0.6/3.3 B have been accepted of claims in process at September 30th.  That is a success rate for the monolines of 20% on their total claims to that date.

 

Anyway, something to think about in terms of estimating MBIA's recoveries on these securities.

 

I found the following thoughts from the CEO of MBIA insightful in explaining their low putback success (Q1 2010 conf call):

We have received money in the past, a very limited amount of money on a limited number of putbacks before the litigation was initiated. We haven’t received any funds on any litigated cases since we began the litigation. In terms of other actions out there, as you would expect the bulk of the recoveries that have been actually observed for putbacks have occurred with the Freddie, Fannie and FHA. I’ve been asked by a number of investors how come they are being successful and getting their putbacks at this point in time and you have not yet been successful. And the answer is that very simple, is that Freddie, Fannie and FHA have a very powerful incentive which is that if you don’t place loans going forward with them – if you want to place loans going forward with them, you probably have to honor past contractual representation and warranties. And we have discussed the process that Fannie and Freddie use with their folks to see how it compares to the process that we use both from examining the loans and also in terms of the accounting and both approaches are consistent with our own. The main difference in our case is the majority of the people who originated mortgages for MBIA in the pool that we securitized, have chosen not to honor the putbacks at the level that we put the loans back to them, which is why we were forced to initiate litigation against them.

 

 

The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts.  Could that be explained away with "political pressure"?

[valuecfa]

The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts.  Could that be explained away with "political pressure"?

 

It was fairly widely anticipated (pre-negotiations) that the GSE's negotiators wouldn't have any teeth.

 

 

[ERICOPOLY]

The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts.  Could that be explained away with "political pressure"?

 

It was fairly widely anticipated (pre-negotiations) that the GSE's negotiators wouldn't have any teeth.

 

 

I hope that's the case.  Personally, I think the law is on the side of MBI, but this is really the only thing that worries me.  Anyhow, I added more shares on Friday and at open today.

 

It ought to get into the $40s in a few years if the courts are on their side.

[Rabbitisrich]

http://online.wsj.com/article/BT-CO-20110322-715628.html

 

MBIA Insurance had loss reserves of $2.056 billion before reinsurance as of Dec. 31, 2008, according to its financial statements. But the independent valuation by BlackRock, taking in 450 deals for a combined $50 billion in assets, predicted future losses of $13.8 billion to $20.8 billion over the next several years. By those calculations, expected losses at MBIA Insurance as of Dec. 31, 2008, would have rendered the unit insolvent, the banks said in a filing.

 

In the most recent ruling, the majority appeared to use current cash flow payouts as evidence of solvency, under which standard the banks have pretty much no chance of proving insolvency.

 

I'm not sure how BlackRock qualifies as an "independent" valuator, though.

[ERICOPOLY]

The 2010 annual report and letter to owners is out:

 

http://investor.mbia.com/annuals.cfm

 

[valuecfa]

The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts.  Could that be explained away with "political pressure"?

 

It was fairly widely anticipated (pre-negotiations) that the GSE's negotiators wouldn't have any teeth.

 

 

I hope that's the case.  Personally, I think the law is on the side of MBI, but this is really the only thing that worries me.  Anyhow, I added more shares on Friday and at open today.

 

It ought to get into the $40s in a few years if the courts are on their side.

 

I wouldn't worry about Jay Brown settling for peanuts. He won't do that. He may do one or two of the smaller settlements for a haircut to add to liquidity, if need be, but i doubt that too. He has the majority of his wealth in MBIA, and i'm sure he is fighting hard on litigation efforts and negotiating settlements. It is difficult for him to settle the large putback cases with the large remaining banks because the majority of them are suing MBIA for the transformation. By settling, pre-transformation trial, they would in effect be hurting their case against MBIA regarding the transformation. This is why at the very least i don't expect any large putback settlements (from banks that are also suing MBIA) until the conclusion of the transformation trial, if there is a trial. In my opinion, the thing to be worried about is the remaining commercial real estate exposure. Despite an improving CRE environment, the extent of the exposure is still large- though rapidly decreasing with settlements and contract amortizations, and very healthy today. They have a pretty fantastic municipal insured portfolio, so i am not worried about their muni exposure on the NPFG side of the business. Looking forward to the conclusion of the separation trial. I've never read so many court filings in my life!

 

As for the GSEs, it was anticipated by myself and frankly most of the investment community that the GSE would settle for peanuts. At the time it was unclear if the private label investors were even able to sue until recently. These are all very different types of cases, where in MBIA was insuring these deals, while private label was investing in them. I think it is likely that private label will settle for a haircut as well (though in my best guesstimate not at the same extent of a haircut as the GSEs (though for a large haircut nontheless), as that trial would go on for ages, and for other reasons. The monolines' trials are well underway and are in fact near conclusion in some cases as trials are soon to begin, so there would be no large pre-litigation haircut if a settlement were to occur. The CEO has his money where his mouth is. He is doing a fabulous job negotiating commutations, and so far MBIA has made a great deal of progress on the litigation front. I'm looking forward to the next 3-9 months.

[ERICOPOLY]

The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts.  Could that be explained away with "political pressure"?

 

It was fairly widely anticipated (pre-negotiations) that the GSE's negotiators wouldn't have any teeth.

 

 

I hope that's the case.  Personally, I think the law is on the side of MBI, but this is really the only thing that worries me.  Anyhow, I added more shares on Friday and at open today.

 

It ought to get into the $40s in a few years if the courts are on their side.

 

I wouldn't worry about Jay Brown settling for peanuts. He won't do that. He may do one or two of the smaller settlements for a haircut to add to liquidity, if need be, but i doubt that too. He has the majority of his wealth in MBIA, and i'm sure he is fighting hard on litigation efforts and negotiating settlements. It is difficult for him to settle the large putback cases with the large remaining banks because the majority of them are suing MBIA for the transformation. By settling, pre-transformation trial, they would in effect be hurting their case against MBIA regarding the transformation. This is why at the very least i don't expect any large putback settlements (from banks that are also suing MBIA) until the conclusion of the transformation trial, if there is a trial. In my opinion, the thing to be worried about is the remaining commercial real estate exposure. Despite an improving CRE environment, the extent of the exposure is still large- though rapidly decreasing with settlements and contract amortizations, and very healthy today. They have a pretty fantastic municipal insured portfolio, so i am not worried about their muni exposure on the NPFG side of the business. Looking forward to the conclusion of the separation trial. I've never read so many court filings in my life!

 

As for the GSEs, it was anticipated by myself and frankly most of the investment community that the GSE would settle for peanuts. At the time it was unclear if the private label investors were even able to sue until recently. These are all very different types of cases, where in MBIA was insuring these deals, while private label was investing in them. I think it is likely that private label will settle for a haircut as well (though in my best guesstimate not at the same extent of a haircut as the GSEs (though for a large haircut nontheless), as that trial would go on for ages, and for other reasons. The monolines' trials are well underway and are in fact near conclusion in some cases as trials are soon to begin, so there would be no large pre-litigation haircut if a settlement were to occur. The CEO has his money where his mouth is. He is doing a fabulous job negotiating commutations, and so far MBIA has made a great deal of progress on the litigation front. I'm looking forward to the next 3-9 months.

 

He certainly has the incentive to win.  I don't know what's up with the GSEs, except that their fiduciary duty is not (incredibly) to their shareholders, but rather to the US Government.  So that's why I suspect it was political pressure to settle -- after all they've been through, they don't want another financial crisis to derail confidence.

 

MBI was the Berkowitz pick that I just couldn't get comfortable with due to the complexity -- but your commentary has helped me understand it (the gist of it).  I wouldn't say I understand it better now, because that would of course imply that I understood some of it to begin with.  It is a big position.  I've had bigger positions in the past, but this is getting up there.

 

Good point about their not wanting to settle before the transformation decision -- the proceeds going to MBIA would torpedo their insolvency argument.  These guys are bastards but I own a lot of BAC too.

[valuecfa]

The trouble of course is that despite the leverage that the GSEs hold, they still settled the put-back litigation for peanuts.  Could that be explained away with "political pressure"?

 

It was fairly widely anticipated (pre-negotiations) that the GSE's negotiators wouldn't have any teeth.

 

 

I hope that's the case.  Personally, I think the law is on the side of MBI, but this is really the only thing that worries me.  Anyhow, I added more shares on Friday and at open today.

 

It ought to get into the $40s in a few years if the courts are on their side.

 

I wouldn't worry about Jay Brown settling for peanuts. He won't do that. He may do one or two of the smaller settlements for a haircut to add to liquidity, if need be, but i doubt that too. He has the majority of his wealth in MBIA, and i'm sure he is fighting hard on litigation efforts and negotiating settlements. It is difficult for him to settle the large putback cases with the large remaining banks because the majority of them are suing MBIA for the transformation. By settling, pre-transformation trial, they would in effect be hurting their case against MBIA regarding the transformation. This is why at the very least i don't expect any large putback settlements (from banks that are also suing MBIA) until the conclusion of the transformation trial, if there is a trial. In my opinion, the thing to be worried about is the remaining commercial real estate exposure. Despite an improving CRE environment, the extent of the exposure is still large- though rapidly decreasing with settlements and contract amortizations, and very healthy today. They have a pretty fantastic municipal insured portfolio, so i am not worried about their muni exposure on the NPFG side of the business. Looking forward to the conclusion of the separation trial. I've never read so many court filings in my life!

 

As for the GSEs, it was anticipated by myself and frankly most of the investment community that the GSE would settle for peanuts. At the time it was unclear if the private label investors were even able to sue until recently. These are all very different types of cases, where in MBIA was insuring these deals, while private label was investing in them. I think it is likely that private label will settle for a haircut as well (though in my best guesstimate not at the same extent of a haircut as the GSEs (though for a large haircut nontheless), as that trial would go on for ages, and for other reasons. The monolines' trials are well underway and are in fact near conclusion in some cases as trials are soon to begin, so there would be no large pre-litigation haircut if a settlement were to occur. The CEO has his money where his mouth is. He is doing a fabulous job negotiating commutations, and so far MBIA has made a great deal of progress on the litigation front. I'm looking forward to the next 3-9 months.

 

He certainly has the incentive to win.  I don't know what's up with the GSEs, except that their fiduciary duty is not (incredibly) to their shareholders, but rather to the US Government.  So that's why I suspect it was political pressure to settle -- after all they've been through, they don't want another financial crisis to derail confidence.

 

MBI was the Berkowitz pick that I just couldn't get comfortable with due to the complexity -- but your commentary has helped me understand it (the gist of it).  I wouldn't say I understand it better now, because that would of course imply that I understood some of it to begin with.  It is a big position.  I've had bigger positions in the past, but this is getting up there.

 

Good point about their not wanting to settle before the transformation decision -- the proceeds going to MBIA would torpedo their insolvency argument.  These guys are bastards but I own a lot of BAC too.

 

I know you are a sharp guy Ericopoly. Probably a lot smarter than me, so i don't mean to tell you what to do, but if you don't understand it very well you may not want to make it such a large position, just based on mine or Berkowitz's commentary. That being said it is a big position for me too. :)

[ERICOPOLY]

I know you are a sharp guy Ericopoly. Probably a lot smarter than me, so i don't mean to tell you what to do, but if you don't understand it very well you may not want to make it such a large position, just based on mine or Berkowitz's commentary. That being said it is a big position for me too. :)

 

I don't think I'm smarter than you.  I do think I take on bigger positions than most people, but it might be just a form of brain damage that prevents me from getting too scared... but I leave enough bread on the table to remain fed if the investment burns in the oven.  I guess some professional managers would worry about losing all of their clients if they had a 30% down year, but I don't have that risk -- I only need worry about whether I can live with the losses myself.

 

I generally just understand the gist of things.  It's the way I roll.  Stumbled a long way through life this way. 

 

Another way of saying it is that I have too much humility -- but even in saying something like that I'm being somewhat arrogant because it's quite a compliment to be called humble.  Maybe it's not humility, just realism. 

 

Really, it's that I know my limitations.  So I piggyback on the decisions of people far more competent -- it's my way of expanding my circle of competence... or "borrowing" somebody else's.  Once I get the gist of their argument (and agree with it), it's enough to keep me from getting too uneasy when the stock pulls back. 

 

Somewhat like when you have an important medical decision to make, in the end you take the doctor's advice.  You might get a second and third opinion, but you still wind up inevitably going with what the experts think is best.  You sort of read a little about it yourself, and come to a decision once you understand what the recommended procedure is and why they recommended.  The experts are sometimes wrong and misdiagnose, or they make mistakes and leave a tool behind.  You live with those risks and accept them.

 

Or if you are the hiring manager of a group of engineers at Microsoft, you may not be the best engineer yourself or not be fluent in every specialty of programming, but you have highly trusted engineers that help you in the interview loop and they give you their input and best recommendation.  You rely heavily on their input to determine the competency of the person you are about to hire.  Your decision is then simplified to basically whether you feel you can trust the candidate and whether they are a good cultural fit.

 

This is what happened with FFH in 2006 -- I didn't really know that much about the insurance industry or weather forecasting, but I understood the gist of it.  I knew a lot about the character and skill of the players involved that were long (including some of the posters on this board), and I had figured out the character of Prem and his close team by who they associated with and the characters of competent investors who were sticking by them.  It's a form of competency I suppose to be able to assess the qualitative aspects of individuals and looking for aggregations of them around a particular investment.

 

 

 

 

 

 

[stahleyp]

eric, if you don't mind me asking, are you long the stock or options?

[ERICOPOLY]

eric, if you don't mind me asking, are you long the stock or options?

 

I just own the stock.

 

The only "research" I've done myself is to read all of the conference calls I could find and the letters to owners.  In there I found confirmation of everything valuecfa wrote.  I owe him big time for condensing the information.  It makes it much easier to sort out -- as I wrote earlier, cliff's notes for Anna Karenina.

[valuecfa]

I know you are a sharp guy Ericopoly. Probably a lot smarter than me, so i don't mean to tell you what to do, but if you don't understand it very well you may not want to make it such a large position, just based on mine or Berkowitz's commentary. That being said it is a big position for me too. :)

 

I don't think I'm smarter than you.  I do think I take on bigger positions than most people, but it might be just a form of brain damage that prevents me from getting too scared... but I leave enough bread on the table to remain fed if the investment burns in the oven.  I guess some professional managers would worry about losing all of their clients if they had a 30% down year, but I don't have that risk -- I only need worry about whether I can live with the losses myself.

 

I generally just understand the gist of things.  It's the way I roll.  Stumbled a long way through life this way. 

 

Another way of saying it is that I have too much humility -- but even in saying something like that I'm being somewhat arrogant because it's quite a compliment to be called humble.  Maybe it's not humility, just realism. 

 

Really, it's that I know my limitations.  So I piggyback on the decisions of people far more competent -- it's my way of expanding my circle of competence... or "borrowing" somebody else's.  Once I get the gist of their argument (and agree with it), it's enough to keep me from getting too uneasy when the stock pulls back. 

 

Somewhat like when you have an important medical decision to make, in the end you take the doctor's advice.  You might get a second and third opinion, but you still wind up inevitably going with what the experts think is best.  You sort of read a little about it yourself, and come to a decision once you understand what the recommended procedure is and why they recommended.  The experts are sometimes wrong and misdiagnose, or they make mistakes and leave a tool behind.  You live with those risks and accept them.

 

Or if you are the hiring manager of a group of engineers at Microsoft, you may not be the best engineer yourself or not be fluent in every specialty of programming, but you have highly trusted engineers that help you in the interview loop and they give you their input and best recommendation.  You rely heavily on their input to determine the competency of the person you are about to hire.  Your decision is then simplified to basically whether you feel you can trust the candidate and whether they are a good cultural fit.

 

This is what happened with FFH in 2006 -- I didn't really know that much about the insurance industry or weather forecasting, but I understood the gist of it.  I knew a lot about the character and skill of the players involved that were long (including some of the posters on this board), and I had figured out the character of Prem and his close team by who they associated with and the characters of competent investors who were sticking by them.  It's a form of competency I suppose to be able to assess the qualitative aspects of individuals and looking for aggregations of them around a particular investment.

 

 

 

Great. By the way, i think i have the same kind of brain damage. :D

[valuecfa]

Interesting headline across CNBC: Hedge Funds Crave Bonds That Almost Killed AIG

 

http://www.cnbc.com//id/42268981

 

MBIA insured similar kinds of crappy bonds and derivatives.

 

[ERICOPOLY]

I found this paragraph in the 2/25/2008 letter to shareholders.  I think it shines a very positive light on the character of Jay Brown (CEO).  A do-gooder:

 

In a move to level the playing field in terms of the cost of capital, we will escalate our efforts to campaign vigorously against the ability of U.S. financial guarantors to reinsure U.S. domestic financial guarantee transactions with foreign affiliates without paying U.S. corporate tax rates. As more money comes into existing and new competitors' public finance business, the discrepancy this loophole allows becomes even more pronounced. In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with U.S. domiciled operations to operate without paying their fair share of U.S. taxes. After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient! I've been against this loophole for years, and discussed it in my first investor conference in 1999. I still don't look good in Bermuda shorts but we will eventually have to move the company if the U.S. tax code is not modified.

[valuecfa]

I found this paragraph in the 2/25/2008 letter to shareholders.  I think it shines a very positive light on the character of Jay Brown (CEO).  A do-gooder:

 

In a move to level the playing field in terms of the cost of capital, we will escalate our efforts to campaign vigorously against the ability of U.S. financial guarantors to reinsure U.S. domestic financial guarantee transactions with foreign affiliates without paying U.S. corporate tax rates. As more money comes into existing and new competitors' public finance business, the discrepancy this loophole allows becomes even more pronounced. In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with U.S. domiciled operations to operate without paying their fair share of U.S. taxes. After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient! I've been against this loophole for years, and discussed it in my first investor conference in 1999. I still don't look good in Bermuda shorts but we will eventually have to move the company if the U.S. tax code is not modified.

 

Good dig. I could however highlight a few past actions that would shine a negative light on his character as well.

 

As an aside, Euromoney magazine is suggesting that Morgan Stanley has finally closed their massive hedge on MBIA, via closed out CDS:

http://www.euromoney.com/Article/2796572/Category/17/ChannelPage/0/Morgan-Stanley-derailed-by-monoline-exposure.html

 

Given the extent (and lumps) they took to hedge their CMBS exposure to MBIA, i wouldn't doubt that, should this story prove to be correct, Morgan Stanley has also commuted their CMBS exposure with MBIA, now that they have closed the hedge. speculating of course.

 

The article goes on to speculate that they have closed the position due to regulatory pressure from the director of banking supervision and regulation at the federal reserve expressing his reservations about the high cost credit protection trades by the large banks, as was released in this letter: http://www.federalreserve.gov/boarddocs/srletters/2011/sr1101.htm