The word this morning that MBIA would have to cut its dividend in order to preserve it’s credit rating has us asking how valuable bond insurance is when its coming from firms whose own financial position may be shaky.
More after the jump.
It seems relatively obvious that there’s not much use in buying insurance for borrowers with great credit—triple A rated titans of corporate America or the State of California—from an insurer whose own finances are shaky. If our economy gets bad enough that California defaults on its debt, does anyone think MBIA will really be in a position to pay off the insurance? That’s the major California and other municipalities have started issuing bonds without insurance, and many have begun to question the logic of insuring triple A rated debt at all.
But as it’s become all too clear that few firms have a firm grasp on their exposure to CDOs, it may be time to start questioning whether insurance from firms such as AMBAC or MBIA are worth the cost even for lower rated bonds. In addition to the news that it would cut it’s dividend and that it had reserved $614 million for losses in December (squarely between its earlier estimate of losses between $500 million to $800 million), MBIA revealed that it was making a $3.3 billion mark-to-market adjustment in it’s CDO portfolio, meaning that it estimates that it’s CDO portfolio’s value fell by that much in the past quarter.
This size of this loss would be shocking if we weren’t already so inured to billion dollar credit portfolio write-downs. As late as October, MBIA took only a $342 million write-down on its credit portfolio. If losses can expand that rapidly in a single quarter, what assurance do we have that they won’t grow even further? We seem to be in an age of rolling write-downs, after all.
To return to our original point: what’s bond insurance from MBIA worth if MBIA’s own financial position keeps deteriorating in this way?
Looks like someone was watching CNBC this morning. Not a very original post Carney…
seriously
have you been in a coma, carney?
you’re about a month late with this
are you at all familiar with the LV monorail? that story’s a little more 2008.
uh, the point of raising capital is so that it DOES have the ability to pay claims. the answer is the value of the insurance is whatever you pay for it. the market has repriced to the exigency of the situation long ago
Maybe now is a good time to talk about credit default swaps?
I mean… does anyone really think that counterparties are going to be able to pay up if any of these companies actually go bankrupt?
hmmm .. you are saying if MBIA goes bankrupt?
I will gladly insure any issuer, on any amounts. Please pay all premiums before the bond is issued to my account in Havana.
Thank you – you are account #1.
Fascinating piece. I hear there’s two Bear Stearns hedge funds that might have some troubles. I hope CFC doesn’t have troubles.
Dewey defeats Truman!
Does anyone else find it ironic that a MONOline insurer is in trouble from a MONOrail??
With that in mind i give you this (god it’s sweet to know you’re leaving your firm and have nothing better to do):
Lyle Lanley: Well, sir, there’s nothing on earth
Like a genuine,
Bona fide,
Electrified,
Six-car
Monorail!
What’d I say?
Ned Flanders: Monorail!
Lyle Lanley: What’s it called?
Patty+Selma: Monorail!
Lyle Lanley: That’s right! Monorail!
[crowd chants `Monorail' softly and rhythmically]
Miss Hoover: I hear those things are awfully loud…
Lyle Lanley: It glides as softly as a cloud.
Apu: Is there a chance the track could bend?
Lyle Lanley: Not on your life, my Hindu friend.
Barney: What about us brain-dead slobs?
Lyle Lanley: You’ll be given cushy jobs.
Abe: Were you sent here by the devil?
Lyle Lanley: No, good sir, I’m on the level.
Wiggum: The ring came off my pudding can.
Lyle Lanley: Take my pen knife, my good man.
I swear it’s Springfield’s only choice…
Throw up your hands and raise your voice!
All: Monorail!
Lyle Lanley: What’s it called?
All: Monorail!
Lyle Lanley: Once again…
All: Monorail!
Marge: But Main Street’s still all cracked and broken…
Bart: Sorry, Mom, the mob has spoken!
All: Monorail!
Monorail!
Monorail!
[big finish]
Monorail!
Homer: Mono… D’oh!
The monorail is a non-issue. Ambac had already reserved for it earlier in 2007. Plus, principal is not due for 40 years.
the article above says “MBIA revealed that it was making a $3.3 billion mark-to-market adjustment in it’s CDO portfolio, meaning that it estimates that it’s CDO portfolio’s value fell by that much in the past quarter.”
This couldn’t be more wrong. the M-T-M adjustment has to do with the fair value of their insured CDS portfolio related to CDO / CDO of ABS, etc. That number will go to ZERO as the exposure runs off (this is a temp adjustment to their books). Writedowns have to do with the value of the security, eg, if it is expected to pay back less than 100 cents on the dollar, then you writedown the value
The monorail bonds are insured by AMBAC
Monorail – Not an issue, but a timely story. Yeah they created a reserve last year, but the default was (almost) yesterday.
Alot more interesting than another tired old, mis-reported CDO story.
and yeah, all all they have to pay is scheduled interest until maturity, so nobody worry. also countrywide is flush, don’t worry about that either.
Carney, if you think the State of California is a great credit, I have a bridge to sell you.
@ 4:27– they’re on the hook for something like $30mm a year in interest on the 2039 & 40 maturities and principal on zeros (the deal was structured w. like $4mm/yr in zeros maturing annually from now until the return of Christ or something). Not a huge number for them BUT– how many other deals like this did they insure?
Has me wondering what the scrap value of the damned thing is.