MBI - MBIA Inc.

[muscleman]

Not at all, you can follow these specific proceedings at:

 

http://www.mbia.com/investor/legal_proceedings_ABNvMBIA.html#ABNvMBIA

 

Similar to the Article 78 case, the only news is all the plaintiffs dropping out except BAC and SG.  I've seen practically no discussion of it anywhere in terms of speculation, a bit surprising given its potential impact.

 

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

 

I am not a lawyer and English is not even my 1st language. I tried to go through these court documents but couldn't understand what is going on. It looks like MBIA tries to dismiss it and it wants this transformation to be challenged only in article 78, but the court denied that in July 2011. After that, a bunch of banks withdrew.

It has been nearly two years. What is going on during this period? The case is forgotten?

What is confusing to me is that I don't even see a ruling from the court saying whether MBIA is right or wrong to transfer assets. It only says MBIA's motion of dismiss is invalid.

 

Well, let's think about it this way.

Even if the $2 bn asset is transferred back to MBIA Corp, the total adjusted book value is unchanged, which is based on $2.3 bn expected settlement with BAC. Now if the rumors are true, and BAC offers only $1 bn to settle, that means the adjusted book value is now $20 instead of $30, so the stock is still undervalued.

It is hard to lose money here.

[muscleman]

http://www.bloomberg.com/news/2013-03-28/bofa-files-notice-of-mbia-restructuring-case-appeal.html

 

BAC filed appeal for article 78 ruling, which is not surprising to me.

[Cardboard]

At what point is BAC unable to play games and delay this thing any further? Is the Bransteen ruling that is coming out soon the silver arrow or will they still be able to appeal elsewhere or sue for something else?

 

IMO, our biggest margin of safety with MBIA comes from the fact that management owns a lot of shares along with Berkowitz and Warburg Pincus. This makes me think that these guys will always try to find the best outcome for the company no matter what is being thrown at them. It does not guarantee a great return, but at least making the best decisions to safeguard and help the company. In BAC case, I am not so certain.

 

Moynihan in the interview with Charlie Rose said that he likes to put the past behind him quickly. We are certainly not seeing that here. If he wanted to, he could write a cheque that BAC can easily afford and be done in an instant. I am also questioning if he is the one calling the shots on this one or if he is on top of it. Who knows? The guy has made lots of mistakes in the past and if he is calling the shots, maybe that he is ultra stubborn and wants a win at all cost. He may also consider the MBIA case to be small potatoes.

 

I was just curious to hear some thoughts about what you guys think of BAC strategy with this whole thing.

 

Cardboard

[muscleman]

At what point is BAC unable to play games and delay this thing any further? Is the Bransteen ruling that is coming out soon the silver arrow or will they still be able to appeal elsewhere or sue for something else?

 

IMO, our biggest margin of safety with MBIA comes from the fact that management owns a lot of shares along with Berkowitz and Warburg Pincus. This makes me think that these guys will always try to find the best outcome for the company no matter what is being thrown at them. It does not guarantee a great return, but at least making the best decisions to safeguard and help the company. In BAC case, I am not so certain.

 

Moynihan in the interview with Charlie Rose said that he likes to put the past behind him quickly. We are certainly not seeing that here. If he wanted to, he could write a cheque that BAC can easily afford and be done in an instant. I am also questioning if he is the one calling the shots on this one or if he is on top of it. Who knows? The guy has made lots of mistakes in the past and if he is calling the shots, maybe that he is ultra stubborn and wants a win at all cost. He may also consider the MBIA case to be small potatoes.

 

I was just curious to hear some thoughts about what you guys think of BAC strategy with this whole thing.

 

Cardboard

 

Have you seen valuecfa's recent posts? BAC added the lawyers in article 77 proceedings to the MBIA's R&W case.

I think they are growing aware that MBIA's pending SJ rulings may affect article 77, so they may decide to settle with MBIA to limit the risk with article 77.

 

In the worst case scenario, I think we would get a go ahead from the judge for the R&W this year, and get the ruling next year. If BAC appeals, it has to put the money into a colleteral account and pay 9% interest per year into it, which is not bad for MBIA shareholders.

[valuecfa]

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

 

We've chatted about the fraudulent conveyance case as well in this thread, earlier on. Basically, the expectation is that this trial will occur after the R&W trial has concluded, thanks to Kapnick. The conveyance case is expected to be more challenging of a case for MBIA should it even make it to trial. Worth mentioning that if putback recoveries occur, that it may make the fraudulent conveyance case somewhat irrelevant, as there would then be enough liquidity to cover MBIA ins corp after BAC commutations that would likely be part of a global settlement, should one occur.

[muscleman]

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

 

We've chatted about the fraudulent conveyance case as well in this thread, earlier on. Basically, the expectation is that this trial will occur after the R&W trial has concluded, thanks to Kapnick. The conveyance case is expected to be more challenging of a case for MBIA should it even make it to trial. Worth mentioning that if putback recoveries occur, that it may make the fraudulent conveyance case somewhat irrelevant, as there would then be enough liquidity to cover MBIA ins corp after BAC commutations that would likely be part of a global settlement, should one occur.

 

Regarding the timing of the R&W trial, earliest expectation would be that the judge rules on SJ for successor liability, maybe in 3 months, and then the trial start in July, and conclude at the end of the year? The latest expectation would be that after 3 months, the judge decided that she needs more info than merely the SJ, and a hearing is scheduled in, let's say, 6 months from now. After that, it takes the judge another 3 months to rule. After that, the trial will be scheduled, sometime in early 2014?

 

BAC would only worry about MBIA's potential impact on article 77, if the judge could rule before the trial for article 77 starts this May, right? Will BAC be notified that the judge would rule on successor liability a few days or at least a few hours in advance? If that is true, then I bet BAC is currently betting on the judge's ruling to be delayed, and if the judge informs BAC that she will rule, BAC would simply settle with MBIA in the last minute. Can it do that? There is only one month left before May, so if the judge rules after that, MBIA's leverage on article 77 would be lost.

[valuecfa]

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

 

We've chatted about the fraudulent conveyance case as well in this thread, earlier on. Basically, the expectation is that this trial will occur after the R&W trial has concluded, thanks to Kapnick. The conveyance case is expected to be more challenging of a case for MBIA should it even make it to trial. Worth mentioning that if putback recoveries occur, that it may make the fraudulent conveyance case somewhat irrelevant, as there would then be enough liquidity to cover MBIA ins corp after BAC commutations that would likely be part of a global settlement, should one occur.

 

Regarding the timing of the R&W trial, earliest expectation would be that the judge rules on SJ for successor liability, maybe in 3 months, and then the trial start in July, and conclude at the end of the year? The latest expectation would be that after 3 months, the judge decided that she needs more info than merely the SJ, and a hearing is scheduled in, let's say, 6 months from now. After that, it takes the judge another 3 months to rule. After that, the trial will be scheduled, sometime in early 2014?

 

BAC would only worry about MBIA's potential impact on article 77, if the judge could rule before the trial for article 77 starts this May, right? Will BAC be notified that the judge would rule on successor liability a few days or at least a few hours in advance? If that is true, then I bet BAC is currently betting on the judge's ruling to be delayed, and if the judge informs BAC that she will rule, BAC would simply settle with MBIA in the last minute. Can it do that? There is only one month left before May, so if the judge rules after that, MBIA's leverage on article 77 would be lost.

 

In the past Bransten has taken about 3 months to write and issue her decisions. If she follows the same timeline then we should have a SL decision around mid April...but in reality it can occur at anytime, sooner or later than that. Both parties don't know when exactly she will issue her decision.

[Guest bottomsup]

Turning back again to my downside analysis, it wasn't to suppose that the anticipated outcome on this thread wouldn't come to pass, only to understand what would happen if it didn't.

 

We agree that it's hard to lose money in terms of a permanent loss of capital, however, the ABV isn't a fully realized value until the policies have expired.  To be more precise, I would claim that while you wouldn't lose money, you would lose opportunity cost hanging onto a single digit return stock for a decade (sure, you could sell at any time, but I would guess the stock price would immediately fall to compensate for a higher demanded return than a single digit percent if something unanticipated occurred).  That's a very real loss in my opinion if you've been demonstrably able to achieve double-digit returns for an extended period of time.

 

The point is not to argue not to invest, but I do think it begs the interesting question of how to size this position.

 

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

 

We've chatted about the fraudulent conveyance case as well in this thread, earlier on. Basically, the expectation is that this trial will occur after the R&W trial has concluded, thanks to Kapnick. The conveyance case is expected to be more challenging of a case for MBIA should it even make it to trial. Worth mentioning that if putback recoveries occur, that it may make the fraudulent conveyance case somewhat irrelevant, as there would then be enough liquidity to cover MBIA ins corp after BAC commutations that would likely be part of a global settlement, should one occur.

 

Regarding the timing of the R&W trial, earliest expectation would be that the judge rules on SJ for successor liability, maybe in 3 months, and then the trial start in July, and conclude at the end of the year? The latest expectation would be that after 3 months, the judge decided that she needs more info than merely the SJ, and a hearing is scheduled in, let's say, 6 months from now. After that, it takes the judge another 3 months to rule. After that, the trial will be scheduled, sometime in early 2014?

 

BAC would only worry about MBIA's potential impact on article 77, if the judge could rule before the trial for article 77 starts this May, right? Will BAC be notified that the judge would rule on successor liability a few days or at least a few hours in advance? If that is true, then I bet BAC is currently betting on the judge's ruling to be delayed, and if the judge informs BAC that she will rule, BAC would simply settle with MBIA in the last minute. Can it do that? There is only one month left before May, so if the judge rules after that, MBIA's leverage on article 77 would be lost.

 

In the past Bransten has taken about 3 months to write and issue her decisions. If she follows the same timeline then we should have a SL decision around mid April...but in reality it can occur at anytime, sooner or later than that. Both parties don't know when exactly she will issue her decision.

[thecynic]

The point is not to argue not to invest, but I do think it begs the interesting question of how to size this position.

 

The Kelly criterion can be used conservatively in such a situation to estimate position sizing. If we assume p=0.6 (prob. of winning), q = 1 - p = 0.4, b = 1 (assuming even odds), then f = (p(1+b)-1)/b = (0.6*2-1)/2 = 0.1 (or 10% of portfolio). However, like you say, we probably have much better than odds then 1 to 1.

[Guest bottomsup]

I think the Kelly criterion has strengths and weaknesses, but I agree it's a reasonable/interesting place to start thinking about the problem.  Your variation assumes a bimodal outcome, however, that includes a complete loss.  I don't see that with MBIA.  I think the more appropriate version would be:

 

f = p/a - q/b.  Where a is the loss delta and b is the win delta.  Taking b = 1 (i.e. a double), a = 0.5 (we lose 50% from here and get a decent return on the run-off) and p = 0.6 (I think it's higher, but with deference to your user name ;):

 

f = 0.6/0.5 - 0.4/1 = 0.8, or in the words of valuecfa, " A lot."

 

So, here's a weakness of Kelly criterion...when math meets a human mind.  Would you put 80% of your portfolio into this?  Could you mentally weather the volatility?  (or should I say, a "weakness of the human mind when it meets math")

 

The point is not to argue not to invest, but I do think it begs the interesting question of how to size this position.

 

The Kelly criterion can be used conservatively in such a situation to estimate position sizing. If we assume p=0.6 (prob. of winning), q = 1 - p = 0.4, b = 1 (assuming even odds), then f = (p(1+b)-1)/b = (0.6*2-1)/2 = 0.1 (or 10% of portfolio). However, like you say, we probably have much better than odds then 1 to 1.

[valuecfa]

While you're exactly right that ABV applies to unearned premiums that have not been earned yet, it does discount them to present value attempting to give it a "current" value. As each policy passes through it pass through to GAAP over time. This is of course how National has been been earning so much income these past few years even while writing no new business...National earned $202 million in pretax income last quarter alone.

 

 

 

We agree that it's hard to lose money in terms of a permanent loss of capital, however, the ABV isn't a fully realized value until the policies have expired. 

 

 

[Guest bottomsup]

Very true!  Currently, as you're probably aware, MBIA is using a discount rate of 2.6% (Note 5: Insurance Premiums).  If interest rates were to rise (and MBIA isn't in long-term instruments during that transition, I need to investigate that), we would have upside on the ABV.  I believe, however, my point still stands, namely that regardless of the NPV, you need to wait out the policy run-off to be a beneficiary of the complete NPV, however that is disbursed, but please correct me if you see things differently.

 

While you're exactly right that ABV applies to unearned premiums that have not been earned yet, it does discount them to present value attempting to give it a "current" value. As each policy passes through it pass through to GAAP over time. This is of course how National has been been earning so much income these past few years even while writing no new business...National earned $202 million in pretax income last quarter alone.

 

 

 

We agree that it's hard to lose money in terms of a permanent loss of capital, however, the ABV isn't a fully realized value until the policies have expired. 

[muscleman]

Hi there, this is my first post to CBF!  I've had a large position in MBIA for some time and wanted to contribute to the discussion (and thanks especially to valuecfa for his quality thoughts to date).

 

I was as happy about the Article 78 decision as everybody else, however, to valuecfa's comment about optionality, I've always considered its outcome in tandem with the fraudulent conveyance case (ABN Amro Bank NV et al v. MBIA Inc, No. 601475/2009).  Where a reversal of the entire transformation would be worse, it only mitigates damage from having the entire capital of National available to MBIA Insurance Corp's exposed to some lesser amount.  MBIA will/has stipulated that some funds were rightfully transferrable because of retained earnings apportioned to National as well as premiums.  How much are we talking?

 

From: http://www.nytimes.com/2013/03/05/business/banks-lawsuit-against-mbia-over-restructuring-is-dismissed.html

 

"In their lawsuit, Bank of America and Société Générale sought to force MBIA to set aside $2.09 billion in dividends, cash and securities it had received from its insurance unit for the benefit of creditors."

 

If found in favor of the plaintiffs, I believe the intercompany loan would be set against this, but this is only a supposition (and at this point, my focus is really on how much MBIA could be hurt at this point in a worst case, not guessing).  As opposed to a loan writedown that valuecfa suggests could happen in the event of MBIA Insurance receivership, National would be stuck on the entire loan amount and an additional $390 million.

 

Just some thoughts.

 

Thank you for bringing this up. I have never heard of this case. I only knew that there are two cases. One is article 78 and the other is R&W.

This case is similar to article 78, but I have never seen it in the shareholder letter or any other sources before.

"Justice Kapnick said her decision did not affect claims by the banks against MBIA itself in a case that the state’s highest court, the Court of Appeals, allowed to go ahead in June 2011."

So this case went ahead in the appeal court in June 2011, and it is still pending the outcome? That is pretty slow...

Is there any articles speculating the outcome of this case?

 

We've chatted about the fraudulent conveyance case as well in this thread, earlier on. Basically, the expectation is that this trial will occur after the R&W trial has concluded, thanks to Kapnick. The conveyance case is expected to be more challenging of a case for MBIA should it even make it to trial. Worth mentioning that if putback recoveries occur, that it may make the fraudulent conveyance case somewhat irrelevant, as there would then be enough liquidity to cover MBIA ins corp after BAC commutations that would likely be part of a global settlement, should one occur.

 

Regarding the timing of the R&W trial, earliest expectation would be that the judge rules on SJ for successor liability, maybe in 3 months, and then the trial start in July, and conclude at the end of the year? The latest expectation would be that after 3 months, the judge decided that she needs more info than merely the SJ, and a hearing is scheduled in, let's say, 6 months from now. After that, it takes the judge another 3 months to rule. After that, the trial will be scheduled, sometime in early 2014?

 

BAC would only worry about MBIA's potential impact on article 77, if the judge could rule before the trial for article 77 starts this May, right? Will BAC be notified that the judge would rule on successor liability a few days or at least a few hours in advance? If that is true, then I bet BAC is currently betting on the judge's ruling to be delayed, and if the judge informs BAC that she will rule, BAC would simply settle with MBIA in the last minute. Can it do that? There is only one month left before May, so if the judge rules after that, MBIA's leverage on article 77 would be lost.

 

In the past Bransten has taken about 3 months to write and issue her decisions. If she follows the same timeline then we should have a SL decision around mid April...but in reality it can occur at anytime, sooner or later than that. Both parties don't know when exactly she will issue her decision.

 

How likely do you think that Bransten will rule on the SJ, or he will ask for a hearing to get more info? I think BAC is probably betting on the second scenario. In that case, the decision about successor liability would be delayed, and would not affect article 77. Is that what BAC is betting on?

[muscleman]

bottomsup and valuecfa, if the explanation here is correct, I think even if BAC could win the fraudulent conveyance case, there is still a good chance that National's $1.7 bn loan won't be written down to zero.

MBIA Corp. could simply placed into rehabilitation, and National would get back its loan, and BAC would get close to nothing from its CDS contracts. Am I correct here?

http://www.streetinsider.com/Analyst+Comments/BofA+%28BAC%29+May+Have+Back+Against+the+Wall+in+MBIA+%28MBI%29+Case+-+Analyst/8208899.html

[Guest bottomsup]

"An MBIA Insurance Corporation rehabilitation or liquidation by the NYSDFS (an “MBIA Corp. Proceeding”) would be an event of default under the National Secured Loan. While National has a perfected interest in the assets pledged to secure the loan and National expects to be repaid in full from the assets pledged to secure the loan, an MBIA Corp. Proceeding could result in challenges to National’s ability to collect amounts due under the loan and in a delay in National’s ability to realize on the collateral securing the loan."

 

My understanding is that since the loan is structured as a perfected interest that the CDS contracts would be junior, however, policyholders would remain senior.

 

bottomsup and valuecfa, if the explanation here is correct, I think even if BAC could win the fraudulent conveyance case, there is still a good chance that National's $1.7 bn loan won't be written down to zero.

MBIA Corp. could simply placed into rehabilitation, and National would get back its loan, and BAC would get close to nothing from its CDS contracts. Am I correct here?

http://www.streetinsider.com/Analyst+Comments/BofA+%28BAC%29+May+Have+Back+Against+the+Wall+in+MBIA+%28MBI%29+Case+-+Analyst/8208899.html

[muscleman]

"An MBIA Insurance Corporation rehabilitation or liquidation by the NYSDFS (an “MBIA Corp. Proceeding”) would be an event of default under the National Secured Loan. While National has a perfected interest in the assets pledged to secure the loan and National expects to be repaid in full from the assets pledged to secure the loan, an MBIA Corp. Proceeding could result in challenges to National’s ability to collect amounts due under the loan and in a delay in National’s ability to realize on the collateral securing the loan."

 

My understanding is that since the loan is structured as a perfected interest that the CDS contracts would be junior, however, policyholders would remain senior.

 

bottomsup and valuecfa, if the explanation here is correct, I think even if BAC could win the fraudulent conveyance case, there is still a good chance that National's $1.7 bn loan won't be written down to zero.

MBIA Corp. could simply placed into rehabilitation, and National would get back its loan, and BAC would get close to nothing from its CDS contracts. Am I correct here?

http://www.streetinsider.com/Analyst+Comments/BofA+%28BAC%29+May+Have+Back+Against+the+Wall+in+MBIA+%28MBI%29+Case+-+Analyst/8208899.html

 

Why would the policyholder's lien be senior to the secured loan? As I understand, policyholder's lien would be the most senior unsecured lien in a bankruptcy proceeding.

http://www.bankruptcylawnetwork.com/bankruptcy-basics-what-is-a-secured-creditor/

 

In a bankrupcy proceeding, the secured creditor can take the collateral.

I read a bankruptcy investing book before, and if I remember correctly, after the secured creditor takes the collateral, the remaining assets will be distributed to the unsecured creditors according to their ranks. The account payable and policyholders will have the highest rank, followed by any senior debt, and then junior and subordinated debt.

Please let me know if this is different for an insurance company? I strongly doubt so. For example, if an insurance company takes an auto loan from a bank to buy a car, and then gets into bankruptcy, the bank could simply repossess the car and that's it. It shouldn't need to worry who are the policyholders and what are their ranks in the liens.

[muscleman]

http://www.financialpost.com/markets/news/Assured+Guaranty+Statement+Stockton+Chapter+Eligibility+Ruling/8179495/story.html

 

I think this affects AGO and MBI a bit.

[valuecfa]

Some commentary

 

http://mbibaclitigtion.blogspot.com/2013/04/time-for-nydfss-lawsky-to-slap-some.html

[muscleman]

Some commentary

 

http://mbibaclitigtion.blogspot.com/2013/04/time-for-nydfss-lawsky-to-slap-some.html

 

Very good comments!

I start to wonder if MBIA is being headstrong instead of BAC in the negotiation. Now that we are clear that even in the worst case scenario, MBIA won't do too poorly, if I were the CEO of MBIA, I would be really tough and ask for $4.5 bn for the settlement until one day before I am forced to rehabilitate.

 

I think the scenarios outlined here makes the fraudulent conveyance case irrelevant. Even if BAC can win that case, it still can't get any recovery from the CMBS if MBIA Corp is placed into rehabilitation.

[Guest bottomsup]

The truth is muscleman that I'm not completely sure.  As a layman, what you're saying is reasonable and applicable towards your standard bankruptcy, however, for the purposes of determining my margin of safety, I decided to imagine the regulator being "arbitrary and capricious" about how proceeds might be directed.  I will replace my ignorance with some studying when I get a chance and report back!  I get nervous when bankruptcy collides with public policy (but maybe I'm suffering a recency bias from the GM case).

 

"An MBIA Insurance Corporation rehabilitation or liquidation by the NYSDFS (an “MBIA Corp. Proceeding”) would be an event of default under the National Secured Loan. While National has a perfected interest in the assets pledged to secure the loan and National expects to be repaid in full from the assets pledged to secure the loan, an MBIA Corp. Proceeding could result in challenges to National’s ability to collect amounts due under the loan and in a delay in National’s ability to realize on the collateral securing the loan."

 

My understanding is that since the loan is structured as a perfected interest that the CDS contracts would be junior, however, policyholders would remain senior.

 

bottomsup and valuecfa, if the explanation here is correct, I think even if BAC could win the fraudulent conveyance case, there is still a good chance that National's $1.7 bn loan won't be written down to zero.

MBIA Corp. could simply placed into rehabilitation, and National would get back its loan, and BAC would get close to nothing from its CDS contracts. Am I correct here?

http://www.streetinsider.com/Analyst+Comments/BofA+%28BAC%29+May+Have+Back+Against+the+Wall+in+MBIA+%28MBI%29+Case+-+Analyst/8208899.html

 

Why would the policyholder's lien be senior to the secured loan? As I understand, policyholder's lien would be the most senior unsecured lien in a bankruptcy proceeding.

http://www.bankruptcylawnetwork.com/bankruptcy-basics-what-is-a-secured-creditor/

 

In a bankrupcy proceeding, the secured creditor can take the collateral.

I read a bankruptcy investing book before, and if I remember correctly, after the secured creditor takes the collateral, the remaining assets will be distributed to the unsecured creditors according to their ranks. The account payable and policyholders will have the highest rank, followed by any senior debt, and then junior and subordinated debt.

Please let me know if this is different for an insurance company? I strongly doubt so. For example, if an insurance company takes an auto loan from a bank to buy a car, and then gets into bankruptcy, the bank could simply repossess the car and that's it. It shouldn't need to worry who are the policyholders and what are their ranks in the liens.

[Guest bottomsup]

Incidentally muscleman, if you're interested in doing some digging, you'll want to review "New York Code Article 74".

 

The truth is muscleman that I'm not completely sure.  As a layman, what you're saying is reasonable and applicable towards your standard bankruptcy, however, for the purposes of determining my margin of safety, I decided to imagine the regulator being "arbitrary and capricious" about how proceeds might be directed.  I will replace my ignorance with some studying when I get a chance and report back!  I get nervous when bankruptcy collides with public policy (but maybe I'm suffering a recency bias from the GM case).

 

[Guest bottomsup]

Herzeca has shared some excellent thinking, thanks for posting valuecfa.

 

Some commentary

 

http://mbibaclitigtion.blogspot.com/2013/04/time-for-nydfss-lawsky-to-slap-some.html

[Guest bottomsup]

Information is sparse, but I did find this little nugget which favors your position (or at least doesn't hurt it):

 

"OGC Opinion No. 2000-67 indicates that the New York Department will investigate its authority to nullify

certain pledges made and security interests granted by a New York-domiciled insurance company prior to

its insolvency in connection with OTC derivative transactions. In support of this position, the New York

OGC opinion cites People, by Van Schaick v. Title & Mortgage Guarantee Company of Buffalo 269 N.Y.S.

16 (1933), which held that the New York Department, as rehabilitator, could seize, at least in part, the

assets of an insolvent insurance company previously transferred to an escrow agent as security for the

benefit of the holders of mortgage certificates issued by the insurance company. In making its decision, the

court stated that the New York Department, as rehabilitator, had greater powers than the insurance

company to seize the aforementioned assets.

 

**It should be noted, however, that neither OGC Opinion No. 2000-67 nor the cited case provide that the

New York Department has the authority to invalidate perfected pledges of assets and grants of security

interest.** Furthermore, since the aforementioned opinion was issued by the New York Court of Appeals, the

New York legislature adopted the Uniform Liquidation Act, which, in part, provides that an issuer has the

authority to foreclose on its security interest as opposed to making a claim against the estate of the

insolvent insurer."

 

The truth is muscleman that I'm not completely sure.  As a layman, what you're saying is reasonable and applicable towards your standard bankruptcy, however, for the purposes of determining my margin of safety, I decided to imagine the regulator being "arbitrary and capricious" about how proceeds might be directed.  I will replace my ignorance with some studying when I get a chance and report back!  I get nervous when bankruptcy collides with public policy (but maybe I'm suffering a recency bias from the GM case).

[ERICOPOLY]

I start to wonder if MBIA is being headstrong instead of BAC in the negotiation.

 

Just ask yourself this...

 

Has the BAC CEO written letters to shareholders fuming emotionally about the MBIA litigation?

[muscleman]

Information is sparse, but I did find this little nugget which favors your position (or at least doesn't hurt it):

 

"OGC Opinion No. 2000-67 indicates that the New York Department will investigate its authority to nullify

certain pledges made and security interests granted by a New York-domiciled insurance company prior to

its insolvency in connection with OTC derivative transactions. In support of this position, the New York

OGC opinion cites People, by Van Schaick v. Title & Mortgage Guarantee Company of Buffalo 269 N.Y.S.

16 (1933), which held that the New York Department, as rehabilitator, could seize, at least in part, the

assets of an insolvent insurance company previously transferred to an escrow agent as security for the

benefit of the holders of mortgage certificates issued by the insurance company. In making its decision, the

court stated that the New York Department, as rehabilitator, had greater powers than the insurance

company to seize the aforementioned assets.

 

**It should be noted, however, that neither OGC Opinion No. 2000-67 nor the cited case provide that the

New York Department has the authority to invalidate perfected pledges of assets and grants of security

interest.** Furthermore, since the aforementioned opinion was issued by the New York Court of Appeals, the

New York legislature adopted the Uniform Liquidation Act, which, in part, provides that an issuer has the

authority to foreclose on its security interest as opposed to making a claim against the estate of the

insolvent insurer."

 

The truth is muscleman that I'm not completely sure.  As a layman, what you're saying is reasonable and applicable towards your standard bankruptcy, however, for the purposes of determining my margin of safety, I decided to imagine the regulator being "arbitrary and capricious" about how proceeds might be directed.  I will replace my ignorance with some studying when I get a chance and report back!  I get nervous when bankruptcy collides with public policy (but maybe I'm suffering a recency bias from the GM case).

 

Thank you bottomsup! This is really interesting information. I would spend some time to understand what kind of assets and the total value of the assets pledged for the National loan. But I think it will be over collateralized.