Sunday, 09 March 2008 00:00

MBIA managment is proving to be a short seller's dream

As I pointed out in my critique of MBIA's Letter to Owners, management has a little beef with the Fitch rating agency. Fitch is the only international rating agency that has shown some balls and credibility as of late. Yes, they passed out those AAA's like "Snickers" on Halloween in the past, but at least now they are trying to save face. That's a lot more than I can say for S&P and Moody's. The net effect is that S&P and Moody's have effectively watered down the moniker of AAA status to being just that, a moniker, without any real or tangible meaning behind it. The industry needs Fitch's harder (or should I say more realistic) stance, to actually lend any semblance of credibility to the term "AAA".

With that being said, MBIA is apparently expecting a downgrade from Fitch and has literally requested that Fitch not rate them any more. They would allow the rating of thier bonds, but not their claim's paying capacity. This is a major faux pas on behalf of management. By even trying to give Fitch the boot, they further water down the already quite diluted respectability of the other two agencies AAA ratings. Do you remember my comical skit on MBIA's valuation from Halloween last year? The cartoons truly exemplify the perception the (smarter end of the) market has on the ratings agencies. The article seems to have been right on point, if not overly conservative in terms of valuation as well, even if you didn't like my jokes (I don't know why you wouldn't like them, I'm actually rather funnySealed). I've been short these guys for a while. Now, nobody in thier right minds will trust MBIA, S&P or Moody's. Do you guys think that your investors, clients and short sellers are stupid! Hey, we're a AAA risk because we won't hire anybody who'll say otherwise - Yeah, that'll work out just fine...

It is not as if the market had much confidence in the trio to begin with, forcing them to pay 14% super junk rates in a 7% environment for a (ahem) "AAA" risk. You guys at MBIA better hope you don't have to come back to the capital markets any time soon! Then again, this should be damn good for Fitch's buy side advisory business.

Last modified on Sunday, 09 March 2008 00:00

10 comments

  • Comment Link Reggie Middleton Wednesday, 12 March 2008 19:01 posted by Reggie Middleton

    @ Bond trader
    To fire Fitch now, of all times, is akin to MBIA committing credibility suicide. I was not joking when I said mgmt was a short seller's dream. I am not confident the fundamentals support MBIA being driven out of business, but after looking at the decisions of management - ex. diluting the hell out of shareholders chasing a mobile target of AAA that can't be assured and was never deserved, deciding to underwrite complex instruments with minimial loss information, firing Fitch when they need he credibility the most, not adjusting their business model earlier on, continuing with thier stock buybacks and dividends for as long as they did, etc. shows that there is still room to drop in this stock. At this point, if I were to short I would be shorting management and not the stock per se.

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  • Comment Link Mark Edmunds Tuesday, 11 March 2008 11:24 posted by Mark Edmunds

    Most readers have probably already seen the attached letter from Fitch, but it seemed so appropriate to the "short seller's dream" theme I could not resist posting it here. Pop some popcorn. Better entertainment than this is hard to come by.

    http://www.fitchratings.com/corporate/ev...

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  • Comment Link Mark Edmunds Tuesday, 11 March 2008 11:11 posted by Mark Edmunds

    I am hardly an expert at this stuff, but the "experts" have shown that they may be the least reliable.

    The Longshore tranche selected by T2 could suffer from selection bias, but it seems relatively typical in terms of subordination and loss experience based on what I have seen. Can a case can be made that it misrepresents the exposures that flow through these CDOs? If so, it would be great to hear.

    Obviously, Longshore is from a difficult year, and more exposed than some other deals, but there are also a handful of other transactions with similar loss potential.

    To the best of my knowledge, the estimates produced by Pershing Square and T2 are already present valued. If they are accurace, the insurance subsidiary and the holding company will almost definitely go under (holdco will probably go first), because there are lots of long term expenses and hundreds of billions of tough exposures that are not contemplated.

    Are the Pershing and T2 analyses less believable than MBIA asserting that there will be only $200M of losses on ABS CDOs?

    I completely agree with you about the difficulty in quantifying losses (particularly on ABS CDOs and munis), and this is why I have liquidated almost all of my short positions in the bond insurers. It would be nice to reverse my position because there is more potential upside, but the latest MBIA letter definitely does not convince me that this would be good for my pocketbook.

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  • Comment Link lowly bond trader Monday, 10 March 2008 17:38 posted by lowly bond trader

    To say the guarantors wrote bad business would be an understatement, and this deal is a perfect example of said bad business. Regarding the presentation...since understanding the mechanics of a CDO-squared would require reading something like 36,000 pages, I will leave the default estimates to you experts. But I would note that the Longshore argument suffers from a little selection bias don’t you think? I mean this is the deal that keeps getting singled out and beaten down by PSQ. Picking out the worst of 90 subprime RMBS tranches with an '07 vintage is the name of the game for the shorts. Conveniently no mention of maturity dates, or the NPVs of these potential liabilities but I digress. The pay-go contention is well disseminated. Anyways, I would argue it is a healthier debate today as opposed to $65 per share ago, no doubt about it. But shorting at $11 with 50 million shares already in the trade is basically a bet on holdco insolvency, not on whether the insurance guaranty company is AAA, AA, A or even B rated. This seems a tough theory to commit capital to given how unquantifiable these potential losses are.

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  • Comment Link Reggie Middleton Monday, 10 March 2008 15:30 posted by Reggie Middleton

    I am actully on the road and my cell phone is making a lousy modem. I will post my opinions to the last few comments Tuesday evening when I get back to NYC.

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  • Comment Link Mark Edmunds Monday, 10 March 2008 15:03 posted by Mark Edmunds

    It is great to see dissenting opinions, but I disagree on the MBIA letter. Rather than presenting solid facts in support of MBIA's strong financial condition, it seems like more of a macro touchy-feely piece. With the exception of the comments on the CDS market (which I found worthwhile and basically agree with, it does not say much that most skeptics were have not already heard.

    To the best of my knowledge, the fact that Fitch does not rate as much SF assets as Moody's or S&P results from the fact that they eliminated themselves from contention because they were less willing to grant inflated ratings to dodgy SF assets (including CDOs). Regardless, given their recent track records, do you trust any of the major rating agencies?

    The $500M of holding company cash may decrease the likelihood of imminent bankruptcy, but eventually the cash will run out if losses at the insurance sub get very ugly.

    It probably does not make sense to completely trust shorts like Whitney Tilson or Bill Ackman either, but the facts appear to support their positions better than MBIA's. The analysis beginning on page 65 of the presentation linked below provides an example. If you are able to blast holes in it, I for one would find this very persuasive. If you do, specifics would be great. For example, rather than simply arguing that fiscal stimilus will make things better, a quanitification of the impact of the fiscal stimulus will be much more convincing.

    http://www.valueinvestingcongress.com/tilson_presentation.php

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  • Comment Link lowly bond trader Monday, 10 March 2008 10:33 posted by lowly bond trader

    Did you read the letter from MBIA. Fitch rates less than 20% of the structured products that MBIA insures, whereas Moody's and S&P have published ratings on more than 80%. To make matter worse, Fitch utilizes Moody's and S&P's ratings for the securities they don't rate (they also charge the most money among the 3 for an IFS). Since you are short you should probably take a gander at the facts presented by management before dismissing them, it would behoove you to know that they started writing new business last week and have $500 million in cash at the holdco level - enough to cover 3 years of P&I.

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  • Comment Link Robert Cote Sunday, 09 March 2008 20:26 posted by Robert Cote

    Everlasting Fed Stoppers? [ducks]

    I would add that there was another abstraction perpetrated by the ratings agencies. They used the same AAA, Aaa, A , etc. rating scale for everything from munis to exotic swaps. Deep in the fine print, sure they explain the fact that these ratings were applicable only within investment categories and were only relative but when retail investors hear simply AAA they are misled.

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  • Comment Link Reggie Middleton Sunday, 09 March 2008 19:59 posted by Reggie Middleton

    I originally had "Now & Laters"!!!

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  • Comment Link Robert Cote Sunday, 09 March 2008 15:15 posted by Robert Cote

    Payday, $100,000 Bars, Oh Henry!, Airheads, Bonkers, Spree, Whoppers and Smarties and all you can come up with is "Snickers?"

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