More Alarmism Over MBIA

The NYT tells us in a headline today that "MBIA Debt Is Setting Up a Quandary". There's real news here - that in practice it could be very difficult for New York's insurance regulator, Eric Dinallo, to take over MBIA's insurance subsidiary, because that would trigger acceleration clauses in MBIA's credit default swaps.

Gari raises some pointed questions about whether it's really as bad as the NYT makes it seem, worrying about a "gap in the Times' ability to get the terms of the CDS contracts on record". But even assuming the NYT has it right, I think the article is overblown.

For one thing, there's a world of difference between losing your triple-A rating, on the one hand, and being forced into receivership, on the other. MBIA is a double-A rated corporation, which puts it on the same level of creditworthiness as the world's strongest banks. Do the likes of Whitney Tilson believe it deserves that double-A rating? No - but it's also worth noting that Bill Ackman has covered the vast majority of his MBIA shorts. In other words, we're still a very long way from MBIA going bust, alarmism from Josh Rosner notwithstanding:

Joshua Rosner, an analyst at Graham-Fisher in New York, said, "It seems to me that if Jay Brown insists on putting the money anywhere other than at the insurance subsidiary or through a new subsidiary directly under it, he is making a very clear statement that he no longer believes in the viability of the insurance company to meet its obligations."

This is, excuse me, utter crap. When Brown said he wanted to recapitalize his insurance subsidiary with another $900 million in equity, he was intending that the subsidiary would continue writing new insurance on the strength of its triple-A rating. Today, the subsidiary is not writing new insurance, which means it doesn't need any new money to support new business, and in fact its capitalization levels - which significantly exceed the minimum needed for a triple-A rating - are only rising, as old risk exposure runs off.

Much better to use the $900 million in a new insurance subsidiary, which can reinsure the old subsidiary's monoline wraps. Dinallo, for one, would welcome such a move:

Mr. Dinallo said he would consider allowing MBIA to put the $900 million into a new company if it reinsured the municipal bonds in MBIA's existing insurance unit.

I like this idea, since it would keep the municipal bond guarantees watertight, while leaving the old insurance subsidiary to support the much more dubious MBS CDS.

Remember that it's not Dinallo's job to ensure that everybody who ever bought CDS protection on a mortgage-backed security can have triple-A certainty in the strength of that protection. Dinallo's job is to worry about insurance, and specifically, with respect to the monolines, their municipal-bond wraps. If by setting up a new insurance subsidiary MBIA manages to keep the municipal bond wraps at triple-A, while keeping the writer of mortgage protection at double-A, that seems like quite an elegant solution to me, and obviates any need to intervene directly.

So if Jay Brown uses the $900 million in a new subsidiary rather than the old one, that doesn't mean for a minute that he thinks the old one can't meet its obligations. It just means he thinks the old one isn't likely to be triple-A any time soon. Which is fine, for a company which would, in that eventuality, effectively be in run-off.

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