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Why Is MBIA Down So Big?


This is the company's largest fall since being listed. MBI posted its first quarterly loss and discontinued stock buybacks.


A question recently came up on MBIA (MBI) because it is down $9 and change today.

Here's why:

  • It's the company's largest fall since being listed. MBI posted its first quarterly loss and discontinued stock buybacks.
    • During the company's conference call the CEO, Chuck Chaplin said the company will halt stock buybacks to retain capital because of weakness in the housing and structured finance markets. The comment was, obviously, taken badly.
    • Reading through the release/notes from the call: MTM losses were substantially higher than expected. $342 million versus $175 million. The question was brought up as to why it marked to model, at a better rate, than what the Street was reporting for similar assets - management did not have a good answer.
    • Insurance premiums earned were worse than anticipated. Management did not have a good vision on where near-term growth is coming from, given collapse of structured finance insurance.

The Okay (there was no real good):

  • The company did not insure a single RMBS deal during the quarter.
  • Subprime exposure has gone down dramatically and new disclosures were made about subprime exposure.
    • As it stands subprime/ABS exposure is a pretty small component of MBIA's asset/liability investment portfolio, which totals $25.8 billion. The portfolio includes $497 million (2.0%) of direct U.S. subprime RMBS and $1,798 million (7.0%) of ABS CDOs. Within the ABS CDOs, there is $696 million of subprime RMBS.
    • All of the subprime RMBS and ABS CDO investments are rated Triple-A, except for $2.0 million which is rated Double-A. The total subprime exposure in the asset/liability investment portfolio is $2,295 million, 59% of which is insured (by either a monoline guaranty or other credit protection), with 10% insured by MBIA.
    • None of the ratings of MBIA's subprime RMBS or ABS CDO holdings were downgraded in the recent rating agency actions as of October 24, 2007.

      Click here to enlarge.

    • None of the 2005-2007 CDOs that MBIA wrapped were effected by the ratings agency downgrades.
    • Most of the company's CDO participations are still rated triple A.
    • Excess capital is in excess of $1 billion.

Bottomline: The loss was certainly disappointing, the conference call left a lot of questions unanswered and MBIA's core business, insuring bonds, does not have a lot of upside catalysts. But to put it into perspective, the markdown amounted to about a 2 percent capital charge versus the 12 percent of equity cap just erased from the stock. Also, trading at less than 1x book and 7x forward earnings, MBI is at the far range of its historical multiples. While I don't want to suggest catching a falling knife, I think that in the next couple of days there will be more clarity, analysts will take down their numbers and the downside, short-term will largely be priced in. MBI might be setting up well for a skew trade. If appropriate I will come up with a good upside downside range.

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Position in MBI.

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