MBI - MBIA Inc.

[ERICOPOLY]

Or they feel that the transformation will not be upheld by the court.  However, I like your version better.

 

You had another theory that banks were refusing to settle putback claims because it would threaten their insolvency argument in the transformation case -- if so, we may get some news this quarter on settlements of putbacks with the banks that withdrew from the lawsuit.

 

[sswan11]

Price below $10 today.  Could someone explain the short thesis on this stock (counterargument)?  I note that Tilson is still apparently short.  I am reading "Confidence Game" by Christine Richard, which doesn't make Brown out to be a very honest CEO.

[valuecfa]

Price below $10 today.  Could someone explain the short thesis on this stock (counterargument)?  I note that Tilson is still apparently short.  I am reading "Confidence Game" by Christine Richard, which doesn't make Brown out to be a very honest CEO.

 

The short version of the short thesis is basically, that the split won't be upheld....and that structured finance losses will not only NOT revert to some degree from their current marks to market, but will in fact get worse over the years and overwhelm not just the structured finance business but overwhelm the municipal business as well.

[sswan11]

The first scenario seems likely but I don't know about the split.  Is there a way to quantify probabilities of these scenarios;  in worst case, does the stock drop below $5 or lower again?

[zippy1]

 

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

 

 

Would it be possible to get a pointer on what these past actions are?

[Rabbitisrich]

Brown's ethics shouldn't be part of the thesis unless the proxy detailing compensation practices is an early April Fool's joke. Retention of expert employees accounts for 10% of the performance measurement, which seems to be a method of paying yourself more for paying yourself more. Furthermore, Brown and co. are rewarded for taking steps to improve ABV to $45 within 2 years. That helps to explain why anticipated legal winnings are deducted from LAE.

 

Berkowitz's hand is needed for these bloodsuckers!

[Packer16]

Thnaks for the idea.  I looked at both MBIA and AGO over the past week.  It appears AGO provides most of the upside of MBI and actually still has an actual bond insurance business.  Given the percevied muni risk that may be out there, AGO may be a way to take advantage of the discount to book (ala MBIA) and get some potnetial growth.  I am assuming any deal MBI makes with banks would be applicable to AGO to and if MBI is sucessful in dividing itslef up AGO could do the same.  Wilber Ross is a big holder of AGO also.  The upside for AGO is a $50 ABV versus a $15 stock price versus MBIA is a $40 ABV with a $10 stock price.  Another player I have not looked at is RAMR (a ABV of $9.31 versus a SP of $1.55).

 

Packer 

[valuecfa]

 

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

 

 

Would it be possible to get a pointer on what these past actions are?

 

Sorry, the specific actions I had in mind were Gary Dunton's and not Jay Brown's . Confused the timeline.

[ERICOPOLY]

That helps to explain why anticipated legal winnings are deducted from LAE.

 

Another viewpoint is that the contract specifies that the banks need to pay up, yet they refuse to do so.  The courts now need to make them live up to the terms of the contract.

 

Let's say for example that a reinsurer with the ability to pay a claim refuses to do so.  Should the insurer just write down the reinsurance recoverable to zero while litigation is pending?  Or would it instead be fair to leave it as an asset while litigation is pending, given that the contract states that they claim must be paid?  Perhaps impair it somewhat, to discount the possibility that the courts won't enforce the contract, and that perhaps the reinsurer won't be able to pay? 

 

 

 

 

 

[Rabbitisrich]

That helps to explain why anticipated legal winnings are deducted from LAE.

 

Another viewpoint is that the contract specifies that the banks need to pay up, yet they refuse to do so.  The courts now need to make them live up to the terms of the contract.

 

Let's say for example that a reinsurer with the ability to pay a claim refuses to do so.  Should the insurer just write down the reinsurance recoverable to zero while litigation is pending?  Or would it instead be fair to leave it as an asset while litigation is pending, given that the contract states that they claim must be paid?  Perhaps impair it somewhat, to discount the possibility that the courts won't enforce the contract, and that perhaps the reinsurer won't be able to pay?  

 

My complaint has more to do with the beneficial impact to management of a negative shareholder event rather than with the accounting treatment. Management does discount the possibility of payer insolvency and time value, but they currently anticipate 100% recovery of par related to losses incurred (which includes to be incurred amounts). I do view the discount to loss and lae as a red flag, however, given that such information communicates management's estimation capabilities, as well as the progress of existing policies. Selecting and weighting information appropriate to the insurance decision is well within management purview. If management provided a separate line item on the income statement resulting in a complete movement of putback recoveries to "insurance loss recoverables" on the balance sheet, then the shareholders can consider the two events (misrepresentation and malcoverage), and the effects of one on the other. Current accounting practices imply some agreement that the incurred losses were pretty much all the issuers fault.

 

But why oh why does management get to use this factor to increase their bonuses? For reinsurers, wouldn't a misread of reinsurer character or capacity strike against management performance? Similarly, shouldn't a misread of issuer character, aided by subsequently lower standards of due diligence on the part of management, also represent a negative? It seems that the implied philosophy is "Ok, we screwed up, but if you want us to fight for you, you better pay up."

 

I wouldn't purchase the company if management character were a necessary component of the long thesis.

[valuecfa]

The upside for AGO is a $50 ABV versus a $15 stock price versus MBIA is a $40 ABV with a $10 stock price.  Another player I have not looked at is RAMR (a ABV of $9.31 versus a SP of $1.55).

 

I'd be a little careful just using ABV as the target price for each company, both to the upside and to the downside. Each company uses their own estimates and methods that differ (in regards to litigation and loss estimates) to come to ABV. Some may be more aggressive than other with their loss expectations, and all have significantly different exposures (MBIA has a safer municipal profile, than AGO, but AGO doesn't have quite the structured exposure). For example, if you think ABV approximates fair value, then one could argue that MBIA could have an upper target price more than $40 (holding constant current reserve estimate levels) given the large discount to expected putback recoveries. If you think no putback recoveries will occur, then you have to roll that ABV back to the value of National, plus and minus holding company cash/debt (and a few other adjustments). You might want to also factor in that MBIA has underestimated losses in recent years. Even if MBIA gets ZERO putbacks, just if the split is upheld, the company is worth significantly more than current share price. Actually, i think it is worth more than current share price regardless, but the separation will take the assumption off the table, and make it a more obvious and immediate action that the market would easily see. Expect extreme volatility over the next 3, 6, and 12 months. If that is not your cup of tea i would stay out.

 

Long MBIA & AGO

[ERICOPOLY]

That helps to explain why anticipated legal winnings are deducted from LAE.

 

Another viewpoint is that the contract specifies that the banks need to pay up, yet they refuse to do so.  The courts now need to make them live up to the terms of the contract.

 

Let's say for example that a reinsurer with the ability to pay a claim refuses to do so.  Should the insurer just write down the reinsurance recoverable to zero while litigation is pending?  Or would it instead be fair to leave it as an asset while litigation is pending, given that the contract states that they claim must be paid?  Perhaps impair it somewhat, to discount the possibility that the courts won't enforce the contract, and that perhaps the reinsurer won't be able to pay?  

 

My complaint has more to do with the beneficial impact to management of a negative shareholder event rather than with the accounting treatment. Management does discount the possibility of payer insolvency and time value, but they currently anticipate 100% recovery of par related to losses incurred (which includes to be incurred amounts). I do view the discount to loss and lae as a red flag, however, given that such information communicates management's estimation capabilities, as well as the progress of existing policies. Selecting and weighting information appropriate to the insurance decision is well within management purview. If management provided a separate line item on the income statement resulting in a complete movement of putback recoveries to "insurance loss recoverables" on the balance sheet, then the shareholders can consider the two events (misrepresentation and malcoverage), and the effects of one on the other. Current accounting practices imply some agreement that the incurred losses were pretty much all the issuers fault.

 

But why oh why does management get to use this factor to increase their bonuses? For reinsurers, wouldn't a misread of reinsurer character or capacity strike against management performance? Similarly, shouldn't a misread of issuer character, aided by subsequently lower standards of due diligence on the part of management, also represent a negative? It seems that the implied philosophy is "Ok, we screwed up, but if you want us to fight for you, you better pay up."

 

I wouldn't purchase the company if management character were a necessary component of the long thesis.

 

Their compensation doesn't concern me that much.  I doubt it will make a huge dent on per share value, nor do I think Jay Brown is going to lie down and twiddle his thumbs with so much of his personal money in the company.  Personally I feel like it would be worse if they were paid based on GAAP book increases.

[Rabbitisrich]

Their compensation doesn't concern me that much.  I doubt it will make a huge dent on per share value, nor do I think Jay Brown is going to lie down and twiddle his thumbs with so much of his personal money in the company.  Personally I feel like it would be worse if they were paid based on GAAP book increases.

 

It's true that the compensation/ethics argument doesn't seriously impair the long thesis, but that's because the current bet is a special situation. Brown was a major shareholder when he oversaw the expansion of non-municipal lines while maintaining financial leverage appropriate for municipal loss rates, and he was the executive chairman from '04-'07. This is not a heroic profile.

 

Again, the issue is not whether Brown's ethics impair the long thesis, but whether he warrants a positive reputation. I think there is solid evidence that he is not especially trustworthy in terms of ethics and business performance. As the long thesis changes, it will probably become a greater concern.

[ERICOPOLY]

He made dumb moves but he is still holding the bag -- ethically, this is no Mozillo.

[valuecfa]

It looks as though CMBS delinquency rate may finally be beginning to plateau over the next several months, climbing only 3 basis points in march:

 

http://www.housingwire.com/2011/04/05/delinquency-rate-on-cmbs-hits-record-high-in-march

 

For the second straight month, we’ve seen the delinquency rate increase in the low single digits (in basis points).  These are some of the best readings we’ve seen since the credit crisis began.

============================

 

A nice article on BAC putbacks and the SEC (has no bearing on the putback litigation, but i liked seeing that the SEC was probing BAC's accounting practices for putbacks, and not MBIA's).

 

http://www.bloomberg.com/news/2011-04-05/bofa-was-pressed-by-sec-for-disclosures-on-reserves-for-mortgage-buybacks.html

[Hawk4value]

I have traded MBIA in the past and made some money but was concerned enough about the litigation regarding the split to eliminate the position. As hard as I might try, I still don't understand how you can handicap the outcome and feel comfortable taking a large position in the company. To me it is analogous to buying GM bonds during the crisis based on whether or not the gov't will bail them out. How can you anticipate what the courts will decide???

 

Sorry if this is a repeat question.

[S2S]

^ That's very much my concern as well... so before I put MBI into the "too hard" category, would anyone (valuecfa, Rabbitisrich, any other more experienced members) care to tackle some of the points listed here? TIA,

 

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

 

 

[ShahKhezri]

Anyone using LEAP's here?  if FY10 was year 3 of the 5-year plan, wouldn't it make sense to look at the 2013's?

 

 

[Rabbitisrich]

^ That's very much my concern as well... so before I put MBI into the "too hard" category, would anyone (valuecfa, Rabbitisrich, any other more experienced members) care to tackle some of the points listed here? TIA,

 

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

 

 

 

I don't own MBI and ValueCfa is the real expert on this thread. Ericopoly wrote about "outsourcing" the legal analysis to Berkowitz's legal advisors.

 

Some of the numbers used by the author seem aggressive. For example, he projects pre-tax consolidated operating expense of $14.97 per share compared to actual expense of $314MM including legal fees in 2010. If I understand correctly, the author also applied a haircut of 50% to earning assets. 

 

 

[finetrader]

I though that this comment have some merits:

 

^{As of June 30, National was exposed to credit losses on $485 billion worth of bonds, or $2,421 per share. Any sane person would much rather have $21.43 (National’s adjusted book value as of June 30) in cash rather than $21.43 in tangible net assets plus the obligation to cover losses on $2,421 worth of bonds, including $13.90 that are junk rated and $222.81 that are rated BBB}

 

Seems not very probable that MBI trades at ABV in this environment

 

[valuecfa]

I though that this comment have some merits:

 

^{As of June 30, National was exposed to credit losses on $485 billion worth of bonds, or $2,421 per share. Any sane person would much rather have $21.43 (National’s adjusted book value as of June 30) in cash rather than $21.43 in tangible net assets plus the obligation to cover losses on $2,421 worth of bonds, including $13.90 that are junk rated and $222.81 that are rated BBB}

 

Seems not very probable that MBI trades at ABV in this environment

 

 

Call me insane! I'd rather pick up the 50 cents for a dollar. ABV for National alone is now over $23/share, and the share price has sunk to $10 (i don't know what either was at the time of the writing of his article). The holding company has some cash & debt, and there is some wind down to factor in as well. Let's just stick with this section of the article above as it will take me a much longer amount of time to retort the entire article point by point, which i may do later in the week after i return home.

 

I haven't gone through that author's figures using financial statements that pertained to the period he was analyzing the company, but i suspect he is tongue and cheek mixing in some of the structured finance exposures.

 

I''m not worried one bit about National's municipal exposure.  There will no doubt be more municipal defaults in the future in this country than has been the case in in the rear view mirror, but National is in terrific shape.

 

--Using current figures- Let's start with the investment grade municipal exposure...99.4% of their gross par exposure is Investment Grade. And, as an example, the 10-year cumulative default rate for all investment grade Moody's rated municipal bond issuers, excluding GO and water/sewer revenue bonds (which would make default rates even MUCH lower), stands at 0.2883%, which is substantially lower than the paltry 0.5208% rate for Aaa rated corporate bonds (to put things in perspective). And 40% of National's total municipal exposure is in GOs.

 

Only 0.6% of National's municipal gross par exposure is < BBB (at $2.747 Billion). All the rest is investment grade. And MBIA's single biggest < BBB exposure is the San Joaquin hills transportation aorridor agency toll road at $600 million. The second biggest issuer in the BIG category is only $176 million. So not that much single issuer risk in the <BBB exposure. Really tiny overall BIG (Below Investment Grade) exposure, and National amortizes about $26 Billion each year. Even when municipal securities do default on the rare occasion, it is important to keep in perspective that though par is insured, there are typically large recovery rates that are vastly superior to corporate recovery rates, as can be seen by the latest high-profile muni bankruptcy in Vallejo, where it seems recovery is at near 100 cents on the dollar- when at first it seemed unlikely.

 

 

 

[finetrader]

I don't think youre insane  :D

 

but since National don't write any more business, I just don't see how IV for National alone be at ABV(23$), a discount for risk seems required.

[valuecfa]

I don't think youre insane  :D

 

but since National don't write any more business, I just don't see how IV for National alone be at ABV(23$), a discount for risk seems required.

 

You certainly can and should discount it further to what ever losses you may expect... but there is already a loss allowance factored in by the company to the unearned premium reserve that is used to compute the ABV. And, for reference, their loss reserve is significantly higher than what losses have historically been on their insured municipals.

[prevalou]

what are not factored in the ABV are the discounted operating expenses until the end of the contracts (especially for a company in run off)

[Myth465]

Any idea whats causing the latest down drift.