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MBIA Isn't Double A Either
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June 20, 2008, 2:13 pm
MBIA Isn’t Double-A, Either
Moody’s yesterday became the last of the rating agencies to downgrade MBIA, but it went the other agencies one better: MBIA falls to A, not AA like Ambac. The rating of its insurance subsidiary plunged to a low investment grade.
MBIA, which never met a critic who was not worth arguing with, says it is “baffled” by Moody’s analysis.
There was one piece of new information, at least to me. Moody’s said, and MBIA confirmed, that as a result of the rating cut, some holders of guaranteed investment contracts will have the right to terminate the contracts or require additional collateral to be posted. Moody’s pointed out that MBIA has plenty of capital for that, given that it did not downstream $900 million of new capital to its insurance subsidiary.
I have a lot of sympathy for MBIA. Not so long ago, virtually everyone assumed MBIA was not only safe but thought it had a phenomenally good business, in which it collected premiums to insure muni bonds whose risk of default was virtually nil anyway. It’s tough to lose a reputation, and it is no fun to have an aggressive short seller telling everyone who will listen that you are toast.
But its problems are not caused by its critics; they are caused by its poor underwriting decisions. (Well, I guess you could argue that they were caused by Moody’s and the other rating agencies. MBIA insured some strange paper that got, but did not deserve, AAA ratings.)
It seems to me that MBIA’s determination to quarrel only reinforces the suspicion it has something to hide. You may recall that a few years ago, MBIA got caught using a funny reinsurance policy to massage its numbers, and was forced by the Securities and Exchange Commission to restate its earnings. The numbers involved then were less important than the realization that MBIA was not above playing accounting games.
Which brings me to the spat over an article that ran in The Times this week, written by my colleagues Gretchen Morgenson and Vikas Bajaj. MBIA reacted with fury, putting out this statement.
(This posting, is, I add, my opinion and not a Times response. If the editors wish to say something about this, they will use a different forum.)
The first point in the MBIA statement is:
“The story leads with the speculative question of ‘whether regulators will let MBIA . . . renege on a promise to shore up a crucial unit with $900 million in capital.’ That phrasing is erroneous, primarily because no such ‘promise’ has ever been made. The $900 million referenced is part of the net proceeds from the Company’s $1.1 billion equity offering that closed in February, which was issued as part of MBIA’s overall capital strengthening plan. The prospectus for the offering stated in the Use of Proceeds section: ‘We estimate that the net proceeds from this offering and the backstop commitment will be approximately $959 million, after deducting estimated expenses relating to this offering and the backstop commitment. The net proceeds of this offering and the backstop commitment shall be used to support our business plan and operations.’ No promise was made to put the capital in MBIA Insurance Corporation.”
Evidently, the problem is how you define “promise.” There is no question that MBIA said that was what it was going to do.
Here’s an excerpt from an MBIA news release put out last week (with emphasis added by me):
“When we reported our first quarter financial results on May 12, 2008, we said that we would downstream $900 million in proceeds from our recent public equity offering from the holding company to our insurance subsidiaries to support our Triple-A ratings,” said C. Edward “Chuck” Chaplin, Chief Financial Officer. “We said then that we would complete the transfer in 30 days or sooner and this deadline is now upon us. However, our landscape has changed.”
He goes on to say they thought that money would save the AAA rating. Since it won’t, why not keep the money and have it available wherever it may be needed?
Fair enough, but is calling MBIA’s statements a “promise” really so misleading that an angry response is called for? If I tell you I plan to meet you for dinner, and don’t show up, did I break a promise or just change my plans?
MBIA’s complaint has been debated in the blogosphere. Felix Salmon of Portfolio.com is sympathetic to MBIA. Sam Jones of the Financial Times is less so, and Yves Smith of nakedcapitalism.com leaves no doubt about her views by posting the headline, “MBIA Lies In Attack on New York Times.”
(Thanks to Mr. Salmon for guiding me to those blogs in this post.)
Companies have the right, and perhaps even the obligation, to correct truly erroneous information about them. But quarreling over the meaning of the word “promise” does not strike me as a useful step in MBIA’s efforts to restore its credibility.
Mr. Salmon, whose productivity can be amazing, had yet another post on MBIA yesterday. In it he captured the most important point about the company now when he said biggest worry regulators may have about MBIA “is not the company’s solvency, but rather its ability to persuade anybody to buy insurance from it.”
He adds, “MBIA has lost an enormous amount of reputation at this point, and if no one’s interested in the products it’s selling, then eventually it might have to be taken over just because it’s not writing any new policies.”
MBIA’s problem now is one that was aptly put a long time ago by Walter Bagehot, the British financial journalist, in his pioneering book on central banking, Lombard Street:
“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”
Comments (5)
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5 comments so far...
1.
June 20th,20083:15 pm
Mr. Norris…
Fortunately we have regulators who encourage public companies to do the right thing…
It’s all very complex with the $ 900 million…
Maybe you should seek some input from Warburg since they were the investors…
MBIA has been caught in a perfect structural market change…
Expect to see more pieces of the credit markets upended before this storm blows all the way over…
Thanks for your excellent reporting…
— Posted by Cate Long
2.
June 20th,20083:32 pm
This a great story and it reminds me of a scene from Francis Ford Coppola’s amazing film Apocalypse Now.
Scene and character setup: Colonel Kurtz (played by the late Marlon Brando) represents MBIA management. Captain Willard (played by Martin Sheen) representing The Times deep in the jungle:
“What did they tell you?”
“They told me that you had gone totally insane, and that your methods were unsound.”
“Are my methods unsound?”
“I don’t see any method, at all, sir.”
You can also listen to a brief sound clip (.wav file) of the above dialog here > http://www.lukefisher.com/insane.wav
Please note: This post is considered parody for legal purposes.
— Posted by Rev. Dave
3.
June 20th,20083:47 pm
MBIA and its peers will survive as “living dead”. They need to reinvent themselves NOW or be taken over…. Their business model no longer can support historical/extraordinary valuations….
It would be interesting to hear from Jay Brown on his vision for the company going forward.
— Posted by Hassan Azarm
4.
June 20th,20084:45 pm
Actually, Yves Smith leaves no doubt about HER views.
Floyd Norris replies: Apologies. The correction has been made.
— Posted by matt
5.
June 20th,20089:23 pm
Mr. Norris:
The term “promise” does seem misleading, so MBIA has a point. Your point that it’s a questionable use of MBIA’s energy to nitpick the terminology seems fair.
My interest would be in gaining a greater understanding of MBIA’s decision to wait up to 30 days (to downstream the money) in the first place. I think if this question were answered we might have a greater understanding of whether the MBIA action was either:
a) fundamentally deceptive - in that they only intended to downstream it if certain future conditions were met (AAA rating stayed intact), but chose not to state the conditionality of the future action.
or
b) an outright lie - they never had the intention or plan at all
or
c) some other explanation that there was some kind of 30 day need for this money to stay at the holding company
My guess is the answer is choice a), but if you are able to get an answer from the shifty managers at MBIA I would greatly appreciate it.
Regards, jbd.
— Posted by john ewing (jbd)