Is MBIA toast?

The top bond insurer says it expects to hold on to its all-important triple-A rating, even after it reported a fourth-quarter loss of $2.3 billion. The loss came after MBIA wrote down $3.5 billion on its credit derivatives.

Shares of MBIA, which fell after the report of the loss, recovered sharply after Gary Dunton, MBIA’s chief executive, sounded bullish on a conference call later in the day.

“Nothing justifies” the 80 percent drop in MBIA’s stock price over the last year, Dunton said. He blamed “fearmongering” and “distortion of the facts” by self-interested parties, a clear reference to hedge fund manager Bill Ackman.

In a letter sent to state and federal regulators on Wednesday, Ackman said he estimated that MBIA's losses on residential mortgage-backed securities and C.D.O.'s would total $11.6 billion. Ackman has been shorting MBIA's stock, betting that the company will eventually collapse.

Dunton contended that the rating agencies in their worst-case scenarios see only a possible $3 billion in losses.

The executive acknowledged that the company had problems. “All of the monolines are paying for their mistakes,” he said. But he added, “We don’t expect that bond insurers will go the way of the buggy whip.”


The sword hanging over MBIA is its holdings of collateralized debt obligations, the value of which have eroded as a result of the collapse of the subprime mortgage market. (See "What's a C.D.O.?")

Last month, the company said its C.D.O. exposure totaled $30.6 billion. Of that, $8.1 billion represented exposure to "C.D.O.'s squared," or C.D.O.'s whose underlying portfolio includes tranches of other C.D.O.'s.

Pressure on C.D.O. values will only increase. Standard & Poor's lowered or put on review ratings on some $534 billion of bonds and C.D.O.'s tied to subprime. S&P said it did not expect the ratings action to add significantly to financial institutions' losses. "However, we believe that total losses for financial institutions will eventually reach more than $265 billion," the ratings agency said.

But MBIA said today that while it had not yet calculated the full impact of the S&P review, it believed that the ratings agency had already tested the impact in its review of the bond insurers.

Amid its losses, MBIA is struggling to hold on to the lifeline of its business—its triple-A rating. That rating provides a blanket of protection for states and municipalities that issue bonds, allowing them to pay a lower interest rate. Without it, the company could collapse.

So the company is trying to shore up its capital, closing a deal with private equity firm Warburg Pincus to invest $500 million. MBIA also cut its dividend and sold $1 billion in notes.

Others believe that investors' fears about a collapse of MBIA are exaggerated. Pointing out that MBIA has already cleared the hurdles of reviews with Fitch and S&P and has raised new capital, Jonathan Laing in Barron's finds "the current price levels of its debt, credit-default swaps, and, yes, even its stock to be absurdly low."

"Moreover, both the debt and equity markets seem to be ignoring the nature of bond insurance," Laing says. Insurers only need to pay out over the life span of the underlying debt obligations, he says. That could mean over 20 years or more.

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