Thursday, January 31, 2008

MBIA Takes a Q4 Loss $2.3B

The all important bond insurer MBIA took a $2.3B loss in Q4 resulting from wiritedowns on its credit derivative portfolio. As stated before in a previous posts (post #1 and post #2) it is the bond insurers that could that could be the problem in the credit-debt swap (CDS) market. Text in bold is my emphasis. From the WSJ:

Bond insurer MBIA Inc. reported its second consecutive quarterly net loss as write-downs in its credit derivatives portfolio rose to $3.5 billion.

The Armonk, N.Y., financial guarantor posted a fourth-quarter net loss of $2.3 billion, or $18.61 a share, compared with year-earlier net income of $181 million, or $1.32 a share.

At the same time, the company said it closed on its $500 million stock sale to private equity investor Warburg Pincus, part of a deal announced earlier this month that will have Warburg invest up to $1 billion in the troubled bond insurer. As part of the deal, two Warburg managing directors took seats on MBIA's board of directors, replacing two current directors. . . . .

. . . . . MBIA's fourth quarter derivatives write-down is more than 10 times as large as the $352.4 million write-down it reported in the third quarter, an indication of the rapidly worsening U.S. housing market and its effect on securities backed by loans made to credit-challenged customers.

Of the $3.5 billion charge, MBIA estimated it would realize $200 million of credit impairment or actual claims payments on the portfolio. In addition to the credit impairment on its derivatives portfolio, MBIA also set aside $713.5 million of pretax loss and loss-adjustment expense due to an expected loss of $613.5 million on its guarantees, and a special addition of $100 million to the unallocated loss reserve for MBIA's prime, second-lien mortgage exposure.

Second lien, or home-equity loans, have shown rising losses as home values plunge in some parts of the country.

MBIA, the nation's largest bond insurer, reported a fourth quarter after-tax operating loss of $407.8 million or an operating loss per share of $3.30. Operating earnings or losses don't take into account unrealized mark-to-market losses or investment gains or losses.

The mean per-share loss estimate of analysts polled by Thomson Financial was $2.97 on revenue of $778 million.

"We are disappointed in our operating results for the year, as the performance of our insured prime, second-lien mortgage portfolio and three insured CDO-squared transactions led to unprecedented loss reserving and impairment activity," Mr. Dunton said in the press release.

MBIA's adjusted direct premiums fell 38% to $262.4 million, on a 98% drop in global public finance and big drops in structured finance worldwide.

MBIA also wrote down the value of its carrying interest in reinsurance unit ChannelRe from $85.7 million to zero.

Earlier this month, MBIA received a "surprise" notice that its all-important triple-A credit rating is under review by Moody's Investors Service. MBIA relies on its credit rating to secure business: lowering the interest rate on municipal bonds by insuring them and, in effect, covering them with its superior rating.

MBIA and other bond insurers have put their ratings at risk by straying from their core municipal-bonds business and insuring the exotic mortgage-backed debt instruments that have led to billions of losses throughout the financial services industry. Fitch Ratings recently cut its triple-A ratings on AmbacInc., Security Assurance Capital Ltd., and FGIC Corp., with all moving down two notches to double-A.

Billionaire investor Wilbur Ross, said to be in discussions with Ambac over a potential acquisition, underscored the ratings urgency in a CNBC interview Wednesday, saying that if he carried through with a potential deal to buy a bond insurer, it would have to take place before a downgrade.

Speaking on CNBC, Mr. Ross wouldn't confirm any interest in Ambac, but said a buy must be made before a downgrade. "Once you lose a triple-A rating, it's hard to get it back," he said. Although Ambac was downgraded by Fitch, it still retains the top rating from the two largest raters, S&P and Moody's.

The credit derivatives problems have bled into bond insurers' municipal bond-insurance business, with many government issuers deciding to skip insurance altogether, and insurance penetration in that sector dropping to around 30% in recent months, according to industry reports.

MBIA seems to have beat that trend with a 13% increase in its fourth-quarter U.S. public finance, though public finance outside the U.S came to a virtual halt, with $2.5 million adjusted direct premiums for the quarter.

As bond insurers have been hit by the plummeting value of their subprime portfolios, regulators in New York and Wisconsin have begun working on a bailout plan that would have big U.S. banks establish a $15 billion line of credit for MBIA and Ambac. The growing uncertainty about the amount of eventual claims the insurers will have to pay on their guarantees is an issue that could complicate any bailout plan.

Insurers play a key role in the financial system by guaranteeing some $2.4 trillion in debt.

On Wednesday, an Oppenheimer Holdings analyst issued a report saying credit downgrades at major bond insurers could cause another $40 billion in write-downs at major U.S. financial institutions because insurers may not have the capital to cover losses on the complex debt instruments they insure. Oppenheimer also said it doesn't see an insurer bailout as a viable option.

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