By: GZ on Lunedì 25 Giugno 2007 15:32
Vediamo come apre oggi ^MBIA#^ dopo il lavoro di demolizione svolta sabato da Barron's
Qualcuno ricorderà che MBIA per chi pensa che ci sia un bolla del credito è uno delle società più vulnerabili visto che vive di credito al consumatore
"..MBIA insures dangerous collateralized debt obligations backed by subprime loans. ..." cioè MBIA assicura i "CDO" (derivati diabolici) costruiti con i mutui immobiliari americani tossici, gente che cammina sui cambi minati
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A Mortgage Meltdown for MBIA
By JONATHAN R. LAING
DESPITE ITS REPUTATION FOR somewhat slipshod underwriting, giant municipal-bond and corporate-debt insurer MBIA seemed to have allayed investors' concerns of late by working its way out of some tough situations.
For instance, an impending debt-restructuring will defer or perhaps eliminate the insurer's obligation to make future principal and interest payments on some $1.5 billion of debt securities it had insured for the troubled Eurotunnel project. Likewise, MBIA has dramatically whittled down its once-$4 billion exposure of securities backed by manufactured housing, $2 billion of rental-car securitizations, and various equipment trust certificates of the formerly bankrupt carriers Northwest and US Airways. The fact is, few financial insurers are better at restructuring problem deals or stringing out repayments of deals gone bad.
Yet trouble may be brewing in MBIA's $1 trillion guaranty portfolio -- and from a piece of it that has been virtually ignored. The potential losses from these obligations could be of a dimension and immediacy that dwarf MBIA's record $170 million in payments to cover bond-guaranty losses incurred when in 1998 a Pennsylvania hospital group named Allegheny Health, Education and Research Foundation, or Aherf, declared bankruptcy. Namely, MBIA could suffer massive losses from the blowback of the subprime mortgage crisis, through the billions of dollars of subprime-mortgage securitizations that MBIA has insured.
MBIA insures dangerous collateralized debt obligations backed by subprime loans.
The issue was first raised by hedge-fund manager Bill Ackman of Pershing Square Capital Management at an investment conference. In a presentation provocatively-entitled "Who's Holding the Bag?," Ackman contended that MBIA has guarantees on some $5 billion worth of potentially dicey securitizations of subprime-mortgage and other types of asset-backed debt that could ultimately damage the company's balance sheet. Based in Armonk, N.Y., MBIA guarantees the timely payment of interest and principal on municipal bonds and other forms of debt.
The peril is particularly acute because the company will have a narrow cushion of perhaps $500 million or so by yearend over the minimum capital level required to maintain a triple-A rating. Currently, MBIA has $6.8 billion in statutory or insurance-company-level capital, plus unallocated reserves of $200 million, to protect its total guaranteed portfolio of $635 billion in par value against loss. And if woes of the subprime-mortgage market continue to wax as some expect, MBIA could sustain claims losses of more than half a billion bucks.
The company is quick to play down such doubts, and it brushes Ackman aside. It points out to Barron's that Ackman's past intimations of MBIA's impending doom -- such as on the Chunnel project -- have come to naught. Ackman has sold large amounts of MBIA stock short, betting on declines, since late 2002, when he issued a lengthy negative report on MBIA -- and has lost money on the trades. Ever since, both sides have engaged in a jihad that has included attempts by each party to push the Securities and Exchange Commission and New York Attorney General into bringing charges against the other side.
The battle royal is far from over, although Ackman appears to be winning the latest round. Since his report in May, MBIA's stock (ticker: MBI) has fallen from over 70 to under 65, despite a strong stock market. Yet renowned value players like Marty Whitman's Third Avenue Fund and Dodge & Cox remain in the stock, no doubt attracted by its modest price-to-earnings ratio of 10.4 times analysts' consensus forecast for 2007 earnings.
As of March 31, 2007, MBIA had insured $5.4 billion in subprime mortgage-backed securities, or MBS, which receive cash flow from underlying pools of mortgages. Here, MBIA probably faces negligible risk, since it generally insures higher-rated classes, or tranches, of MBS, including the triple-A bonds that have first dibs on the flow of mortgage interest and principal payments cascading down the payment waterfall.
But MBIA could be in significant peril as a result of its guarantee of a class of subprime-mortgage derivatives called collateralized debt obligations, or CDOs. These instruments represent a degree of separation from underlying mortgage-backed securities, since CDOs are constructed from individual classes hived off from different MBS or, in the case of "CDOs-Squared," classes of other CDOs.
THE RISK OF CDOS IS AMPLIFIED BY THE FACT that they tend to be built from lower-rated tranches of different mortgage-backed securities, classes far below the top of the payment cascade. Thus, any depletion in the value of mortgage pools backing the MBS can so restrict the flow of cash down to the tranches near the bottom of the waterfall that the CDO investors, in effect, die of thirst.
On its Website, MBIA said that as of year end, some $2.4 billion of the total $7.7 billion in mortgage CDOs it has insured were backed by subprime mortgages. The $2.4 billion of CDOs, in turn, is a mix of "mezzanine" and "high-grade" CDOs, according to the company. Mezzanine portfolios are comprised of MBS tranches rated no higher than triple-B, while about two-thirds of high-grade CDOs are made up of single-A tranches.
The risks in such CDOs are indeed daunting, should the subprime-mortgage market continue to deteriorate. The triple-B tranches of MBS are protected by a mere 7% or so of the underlying mortgage pools of total collateral. So, if the cumulative collateral losses mount to 7%, the holders of the triple-B tranches would torched. Once losses hit 10%, the single-A tranches also get snuffed.
Although MBIA's stock looks cheap by some measures, it could take some hits from the company's securitizations of subprime loans. A key index of such securities has fallen some 40% since January.
While in a 10% loss scenario, more than 85% of an MBS capital structure would survive intact, subprime CDOs built from lower-rated MBS tranches would face catastrophic losses. Many mezzanine CDOs would be completely pancaked. Meantime, high-grade CDOs could lose as much as 65% of their value as the A-rated tranches took gas. MBIA typically insures only the triple-A portion of the latter, but this affords it only 20% collateral protection before the losses attach to it. Yet it would be potentially on the hook for covering 45 percentage points of the 65% in overall losses or over half of the 80% in par value it had insured.
SUCH A MELTDOWN IN SUBPRIME, ONCE DEEMED remote, is indeed possible these days. Since January, the ABX index that measures the performance of triple-B subprime MBS tranches has lost nearly 40% of its value. Credit downgrades of MBS are spiraling, with Moody's alone chopping the ratings of 131 bonds earlier this month.
In a report, Moody's dolefully revealed that an unprecedented 3% of the subprime mortgages securitized in last year's third quarter are now in foreclosure. Likewise, the rating concern projected that because of unfavorable trends in home prices, mortgage rates and lending standards, cumulative losses on loans backing 2006 subprime securitizations will "generally range between 6% and 8%." Some private estimates see losses of 10% or more in the 2006 loan vintage.
Part of the problem is mortgages taken out by fraudsters who lied on their applications as to their income and net worth, and by property-flippers who mail in their home keys after seeing home prices fall in such premium markets as California, Florida, Arizona and Las Vegas.
A far more ominous drama figures to play out over the next two years, when more than $600 billion in subprime mortgages will "reset" from low, fixed teaser rates to higher-floating rates. Monthly payments will soar 50% or more for already-financially strapped homeowners caught in a proverbial roach motel.
Tightened lending requirements and falling home values will likely choke off any opportunity to refinance at attractive teaser-rate levels. Nor will these homeowners be able to find refuge in a fixed-rate, 30-year loan, with no equity value in their homes and long-term rates moving up.
In such an environment, foreclosure rates figure to soar and lender-recovery rates to plummet. And efforts by lenders to restructure loans via interest-rate reductions, payment deferrals and the like in order to avoid foreclosure will be all the more difficult because of the complexity of sub-prime loans, now mostly lodged in securitizations.
Contacted by Barron's, MBIA officials denied that either its $5 billion in mezzanine CDOs or its $2.4 billion in subprime-mortgage CDO exposure constitutes a major risk to the company. Firstly, its mezzanine CDOs consist of other types of collateral in addition to subprime mortgages, including prime mortgages, corporate debt, credit-card receivables and auto-loan paper. Many of the CDOs are likewise overcollateralized, although the company refused to quantify at what level. Likewise, the levels or tranches of CDOs insured by MBIA often sit higher up in the structure than even the triple-A level, with additional collateral protection.
The latter consideration, however, may prove nugatory -- a luxury suite on the Titanic, if you will -- should MBIA's subprime mezzanine CDOs run into trouble. Senior position matters little if all the collateral gets wiped out. The company conceded that some $800 million of its $2.4 billion subprime CDO collateral is of the mezzanine variety, with "some small buckets"of double-B tranches mixed in with the triple-B holdings. Collateral impairment could thus move more rapidly up the CDO structure than even the bears imagine.
A dose of skepticism certainly is in order for dealing with MBIA, since the company has sometimes seemed less than candid in its recent history. One only has to look back to the aforementioned $256 million bond default in 1998 by the hospital chain Aherf, when MBIA cooked up an apparently phony reinsurance scheme to avoid taking a $170 million charge to earnings that year.
The full $170 million amount was made good by three European reinsurers. At the same time, MBIA entered into a reinsurance agreement on future business with the same reinsurers, guaranteeing them nearly $300 million in future premiums over a period of years. Subsequently, MBIA insisted that the $170 million in loss payments and the $297 million in future premiums wasn't a disguised loan agreement but two separate, bona fide reinsurance deals. The appeal of that interpretation was clear: If the opposite were true, then MBIA wouldn't have qualified for insurance-accounting treatment. Instead, it would've been required to take a $170 million charge, dinging 1998 earnings by 25% -- a serious blow to its dependable growth-stock image and its then much-ballyhooed claim of being a zero-loss underwriter. By virtue of a decorously long payback period, MBIA could both spread and bury the loss over seven years or more.
Finally, in early '05, the MBIA story began to unravel as a result of an aggressive joint investigation of the Aherf deal by the New York Attorney General's office, SEC and the U.S. Justice Department. Smoking guns abounded. Among other things, investigators turned up secret side agreements between MBIA and the reinsurers, leaving little doubt as to the true loan nature of the transaction.
MBIA AGREED TO PAY FINES AND RESTITUTION of $75 million without "admitting or denying any wrongdoing." It also was required to hire and pay for an independent consultant to review the company's auditing, compliance and accounting procedures and investigate some other possibly suspect MBIA deals. In a posting on its Website, MBIA says that it doesn't "anticipate any further enforcement action with respect to any of the matters being reviewed by the Independent Consultant or with respect to any of the other matters that were under investigation."
That may be too optimistic. The consultant, John Siffert, is a tough former federal prosecutor in Manhattan who's now a civil and criminal litigator. And unless he has gone native during his MBIA probe, he should have plenty of grist for his mill in MBIA's handling of an investment it made in the late '90s in a municipal property-tax lien company called Capital Asset Research.
The Capital Asset contretemps began innocently enough, with MBIA's parent concern purchasing a 46% stake in the lien concern for just $15 million. But by 1998, just two years later, the company had gone haywire and MBIA was in deeply over its head. Just how badly came out at a Capital Asset directors' meeting when Gary Dunton, then MBIA chief investment officer and now chairman, president and CEO, was caught on videotape complaining to a fellow director that MBIA's exposure to Capital Asset's woes had ballooned to something like $500 million.
Two weeks earlier, the same Dunton had assured analysts on a conference call that MBIA had only about $140 million at risk in Capital Asset and three other municipal finance operations it had lumped into the same unit.
MBIA, which has not commented on the Capital Asset saga, ultimately suffered around a $300-million loss, but was able to delay recognition of $200 million of that over the next eight years or so by prevailing on its insurance unit to guarantee two securitizations of more than $300 million of Capital Asset's horribly-performing tax lien portfolio. The quality of one of the securitizations was so bad that MBIA whimsically dubbed it "Caulis Negris," an incorrect Latin translation of "black hole."
Such non-triple-A behavior for a time emboldened Pershing Square's Ackman and fellow shorts to think the unthinkable -- that perhaps the rating agencies like Moody's and S&P might decide to take away MBIA's vaunted credit rating. Such a move would be the proverbial knockout punch effectively putting the company out of business.
Bottom Line
If the subprime-mortgage market worsens, MBIA could sustain claims losses exceeding a half-billion bucks. It might have to issue more stock, diluting shareholders.But that is highly unlikely. MBIA is one of the rating agencies' biggest revenue sources. They are also loath to call into question their triple-A ratings on the $635 billion par value of MBIA-guaranteed debt that's currently outstanding. A sudden markdown of that much debt could have calamitous legal and political repercussions for the rating-agency oligopoly.
So these days, Ackman and the other shorts have more modest ambitions. By constantly sounding the undercapitalization tocsin, they hope to starve the holding company by cutting off the flow of munificent upstream payments from the insurance unit that the parent has used to bolster the stock through fat dividend payments and large stock buybacks. Or even better, the shorts are hoping that a spiral in future claims losses might force the holding company to raise more equity and dilute shareholders.
If the subprime-mortgage market continues to unravel, the shorts might finally get a measure of solace.
