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MBIA: Waiting for the Inevitable Downgrade
How is it possible that MBIA lost $2.3 billion in the fourth quarter in the wake of a monster $3.5 billion charge? Didn't Jonathan Laing just tell us, in Barron's, that its losses could never get so big so fast?
Any future MBIA claims loss, even using the wildly inflated number of $10 billion from a long-time MBIA antagonist, hedge-fund manager Bill Ackman, will be dribbled out over the 20-year -- or in some cases 50-year -- life span of the obligations. Thus, the present value of any claims costs dwindles dramatically in relative significance...
Before Warburg cut its deal with MBIA it brought in outside consultants to stress-test the company's portfolio, subjecting it to Armageddon-like housing and other economic assumptions. It found that annual loss expenses -- actual checks written -- came to no more than about $250 million a year under the harshest of conditions.
Of course, all of this is music to the ears of Bill Ackman, of the $109,000 photocopying bill, whose latest research on the monolines can be found here; it's very bad news for investors in credit more generally, who saw the iTraxx index of crossover spreads jump 26 basis points on the news.
For the fact is that cashflow losses are really not that important, in a mark-to-market world. It doesn't matter how much liquidity is available to MBIA: if it's insolvent, it doesn't deserve its triple-A rating. And in fact a loss of that rating has been priced in to the stock for some time now. We're all just waiting for Moody's and S&P to pull the trigger.
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