Why MBIA's Change of Plans Makes Sense

Yves Smith is very unhappy about the fact that MBIA isn't throwing $1.1 billion of its shareholders' money into the black hole that is its insurance subsidiary. She calls the decision "shameful" and "scandalous", but it seems simply sensible to me.

As MBIA CEO Jay Brown explains, now that the insurance subsidiary no longer has a triple-A rating, there's no point in trying to shore it up with new capital in order to retain that triple-A rating. Instead, he would like to "use one of our two fully licensed subsidiaries as a Triple-A subsidiary for new public finance business".

MBIA is a monoline insurer, after all, and if it's going to be allocating capital to an insurer, it should be allocating capital to one with a triple-A rating and good prospects of profitability going forwards. Alternatively, if it can't put the capital to good use, it should return it to shareholders in the form of equity or debt buybacks - an option which Brown is leaving open.

But there's really no point at all in injecting extra money into the old insurance company which is now going into run-off - especially since, as Brown writes:

The change in ratings does not trigger any liquidity issues for MBIA Insurance Corporation, as the construct of our business model has been specifically designed to protect against any liability acceleration from ratings downgrades.

In other words, the insurance subsidiary doesn't need the money in order to continue operating in run-off. The only reason to recapitalize it would be to keep it operating as a going concern, writing new business - and that's clearly not going to happen, now it's lost its triple-A.

Much better, then, that the money be used elsewhere instead.

That said, however, there has been a significant drop-off in Brown's letter-writing abilities. He's now started slipping into jargon occasionally, which has got to be a bad sign:

Given that the agencies have taken the option of maintaining the Triple-A rating of MBIA Insurance Corporation off the table, we have turned our attention to what are the best steps we can take to increase shareholder value while maintaining our human resource strength and adequate capital for our existing policyholders and proceeding with our transformation plan to operate multiple business entities under a different franchise structure.

Still, he remains a much better letter writer - and leader - than the overwhelming majority of other CEOs. If I were an MBIA shareholder, I wouldn't be happy about the stock price performance. But I wouldn't be unhappy about Brown personally.

(HT: Jones)