31 January 2008

House of Cards

MBIA posts $3.5 billion loss
By Dan Wilchins, Reuters News Service
2 hours, 13 minutes ago

NEW YORK (Reuters) - MBIA Inc, a bond insurer struggling to keep the top credit ratings necessary to win new business, posted a record quarterly loss after writing down $3.5 billion and said it was looking at ways to raise equity to shore up capital.

The loss was wider than expected, and MBIA's shares fell 8 percent.

The world's largest bond insurer is looking to raise capital, but finding investors will be difficult. Smaller rival Ambac Financial Group Inc, which also faces potential rating downgrades, earlier this month scrapped plans to issue $1 billion of equity or convertibles, citing market conditions.

MBIA, which traditionally focused on insuring municipal bonds, strayed into insuring repackaged subprime mortgages and other consumer debt in recent years in an effort to boost returns.

That move has cost it dearly. Besides the $3.5 billion write down of credit derivatives linked to subprime mortgages, MBIA said on Thursday that it was setting aside an additional $713.5 million for losses, of which $613.5 million was for specific impaired bonds.

MBIA reported a fourth-quarter loss of $2.3 billion, or $18.61 a share, compared with a year-earlier profit of $181 million, or $1.32 a share.

On an operating basis, MBIA lost $3.30 a share, wider than the $2.97 loss forecast by analysts polled by Reuters Estimates. The operating number excludes losses on financial instruments at fair value and foreign exchange and estimated credit impairment on insured derivatives.

More pain may be coming. Activist investor Bill Ackman, who has been betting MBIA shares would decline for years, said in a report on Wednesday that the company could face losses of more than $11.6 billion from its collateralized debt obligations and related exposure.

Losses and boosts to reserves have slashed MBIA's net worth as a company, as measured by the recorded value of its shareholders' equity, to $3.65 billion as of the end of December from $7.2 billion a year earlier. As of the end of the third quarter, MBIA insured more than $670 billion of debt.


Since the end of 2007, MBIA has taken steps to boost capital, including selling $1 billion of surplus notes and securing up to $1 billion of financing from private equity firm Warburg Pincus. The Warburg Pincus deal, which closed on Wednesday, includes a $500 million investment in MBIA equity and a commitment to backstop a $500 million rights offering.

One possible investor in MBIA is billionaire Wilbur Ross, who told CNBC this week that he was looking at investing more than $1 billion in bond insurers.

MBIA Chief Executive Gary Dunton said capital raising should would offset the reserve boosts and impairment.

"We believe that these steps, along with reduced capital requirements resulting from slower business growth, will result in our capital position surpassing rating agency Triple-A requirements," Dunton said in a statement.

Without new capital, MBIA's main unit is in danger of losing top credit ratings from Moody's Investors Service, which said earlier this month it might issue a downgrade. That would make it hard for MBIA to win new business, and could also force investors to sell billions of dollars of securities.

Concerns about MBIA's ratings appear to be affecting new business. The company's fourth-quarter adjusted direct premiums, a measure of the value of new business won during the period, fell 38 percent to $262.4 million.

Fears of the impact of ratings downgrades on MBIA and other bond insurers, which combined insure more than $2.4 trillion of debt, have spurred New York State Insurance Superintendent Eric Dinallo to try to arrange a rescue with banks and others.

MBIA shares were down $1.12 at $12.84 in early New York Stock Exchange trade. The stock had fallen 12.6 percent on Wednesday, bringing it down 81 percent over the past year.

The company's loss came after Ambac earlier this month posted a $3.3 billion quarterly loss after writing down $5.2 billion for credit derivatives positions linked to assets including mortgages.

(Additional reporting by Ritsuko Ando and Christian Plumb; Editing by Lisa Von Ahn, Steve Orlofsky and Greg Mahlich)

Okay, so now the bond insurers are next in the cascading house of cards. Once the financial institutions have to start shoring up even more on the losses incurred on the rating adjustments that are happening to MBIA and Ambec, if the losses are big enough the industry will start triaging itself and only the big players will have the capital to cover their positions. Some of these places haven't even written off their losses from the mortgage debacle. Yikes. This is going to be an annus horibilis for anyone that has money.

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