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15 Desk Item - Federal Home Loan Coupon Notes Investment Strategiesto'NN aF MEETING DATE: 8/1812008 ITEM NO: 15 DESK ITEM SOS GA COUNCIL AGENDA REPORT DATE: August 18, 2008 TO: MAYOR AND TOWN COUNCIL FROM: GREG LARSON, TOWN MANAGER SUBJECT: ACCEPT STATUS REPORT AND CONSIDER DISPOSITION OF FANNIE MAE AND FREDDIE MAC FEDERAL HOME LOAN COUPON NOTES INVESTMENT STRATEGIES DISCUSSION: Council Member Glickman requested that the attached material be distributed to Council for this item, PREPARED BY: GREG LARSON Town Manager GL:pg NAMGR1AdminWorkFi1es12008 Council ReportM-18 Desk Item R 15.doc Reviewed by: Assistant Town Manager Town Attorney Cleric Administrator Finance Community Development Bloomberg Printer-Friendly Page Page 1 of 2 L Harman, LECG, MBIA, R.H. Donnelley, SanDisk: U.S. Equity Movers By Lynn Thomasson Aug. 18 (Bloomberg) The following companies are having unusual price changes In U.S. markets. Stock symbols are in parentheses after company names, and prices are as of 11:40 a.m. in New York. Mortgage lenders Fannie Mae (FNM US) and Freddie Mac (FRE US) fell the most in the Standard & Poor's 500 Index. Barron's said it is ' ' increasingly likely" the U.S. Treasury Department will recapitalize the home-loan providers, which would leave the shares worthless. Fannie Mae lost 14 percent to $6.77. Freddie Mac declined 14 percent to $5.04. The stocks led finan gals in the S&P 500 to a 1.5 percent drop, the biggest among 10 industries. San Difsk Corp. (SNDK US) slumped 7.7 percent, the most in a month, to $16.28. The shares of the biggest maker of memory cards for digital cameras should be sold following the stock's 15 percent gain this month, Citigroup Inc. analysts said. Fir-st MarblTF:ead Ci.rp. (FMD US) increased the most since December, adding 44 percent to $4.32. The arranger of securities backed by student loans replaced its chief executive officer and said it obtained financing from Goldman Sachs Group Inc.'s private-equity arm. Homan Inte; national Inds :tries, In=. (HAR US) dropped 6.8 percent to $34.48, bringing its four-day loss to 21 percent. On Aug. 15, the audio-equipment maker reported quarterly earnings that decreased more than some analysts estimated. Hl-rshey Co, (HSY US) dropped the most since September 2002, tumbling 9.8 percent to $37.53. The largest U.S. chocolate maker said price increases will curb sales and profit growth in 2009. Citigroup Inc. cut its rating on the shares to ' ' hold" from ' ' buy." Huntington Bancshwres Inc. (HBAN US) dropped 7.2 percent, the most since July 28, to $7.40. The Ohio-based bank, which has a lending agreement with subprime mortgage company Franklin Credit Management Corp. (FCMC US), said Franklin will probably report a second-quarter loss as high as $285 million. FTN Midwest Securities cut Huntington to ' ' sell" from ' ' neutral." LEC-G Corp. (XPRT US) tumbled 11 percent, the most since July 30, to $8.20. The provider of expert testimony and advice to companies was cut to ' ' neutral" from ' ' buy" by UBS AG. MBIy Inc. (MBI US) advanced for a fourth day, rising 5.3 percent to $11.81. Ambac Finanzial Grua-iilp (ABK US) increased 7 percent to $6.08. Standard'& Poor's affirmed its rating of 619 classes of U.S. asset-backed securities backed by the two largest bond insurers. S&P last week maintained the companies' credit ratings and said they are taking steps to shore up their businesses. R.H. Donnelleey Corp. (RHD US) rose 23 percent, the most since July 23, to $2.31. The yellow-pages publisher, buckling under $9.7 billion in net debt and falling advertising revenue, may rally from its 94 percent decline this year if the directories remain popular, Barron's said, citing no one. he:igdaTech Inc. (SDTH US) gained the most since Aug. 5, rising 5.8 percent to $10.07. The China- based maker of chemicals reported second-quarter adjusted profit of 18 cents a share, more than the 14-cent average estimate of analysts surveyed by Bloomberg. Unlori"n .ai = or p. (UB US) rose 12 percent to $73.21, the highest since at least 1985. Mitsubishi UFJ http://www.bloomberg.com/apps/news?pid=2067000I&refer=&sid=aMwHD T4D4CI 8/18/2008 Bloomberg Printer-Friendly Page Page 1 of 2 MBIA, Ambac dump After S&P Ends Credit Rating Review (UpdateS) By Jody Shenn Aug. 15 (Bloomberg) i`IBIA inc. and Amnbac Financial Group Inc., the bond insurers that lost at least 79 percent of their market value in the past year, rose in New York trading after Standard & Poor's affirmed the companies' credit ratings and said they are taking steps to shore up their businesses. Ambac rose $1.12, or 25 percent, to $5.68, the highest since April, in New York Stock Exchange composite trading. MBIA climibed 90 cents, or 8.7 percent, to $11.22, the highest since May. MBIA Insurance Corp. and Ambac Assurance Corp. remain AA rated, New York-based S&P said in statements yesterday. ' 'This is just another indication that the words ' insolvency' and Ambac and MBIA should not be used in the same sentence," said Torn Bri vurs, the chief executive officer of New York-based Second Curve Capital LLC, which holds shares of MBIA and Ambac. S&P, which stripped away the companies' AAA bond insurer ratings in June, ended a review for further downgrades and said the companies are doing well enough to maintain their current AA status. The affirmation may help to strengthen a recovery in financial company shares that began July 15, Brown said. ' 'You need actions like this to help reduce the fear and pessimism," Brown said in a telephone interview today. Financial stocks in the S&P 500 rose about 1 percent today and are up about 23 percent since July 15. Creditworthiness Armonk, New York-based MBIA and New York-based Ambac as of June 30 guaranteed about $1.1 trillion in bonds and securities issued by cities, states, corporations and other businesses. The value of those guarantees and the ability to sell new policies declined after the bond insurance units lost their AAA ratings. Perceptions that the creditworthiness of bond insurers is declining contributed to the more than $502 billion in asset writedowns and credit losses at the world's top banks and brokers since the start of last year. Bond insurers owned by MBIA, Ambac, Syncora Holdings Ltd., FDIC Corp., and CIFG Holdings lost their top ratings as losses grew from collateralized debt obligations and other mortgage- linked securities. MBIA Insurance's capital levels remain ' 'well above the level required for a AA rating," S&P said. Ambac Assurance's efforts to cancel protection on mortgage-linked debt also ' 'are starting to bear fruit," the ratings company said. ' ' I still think the rating agencies are acting like lunatics" for not assigning higher ratings, Brown said. CDOs Ambac said Aug. 1 it tore up a $1.4 billion CDO contract with Oitig3'oup Inc. for $850 million. CDOs repackage assets such as mortgage bonds, loans and derivatives into new securities with varying risks. ''Ambac's remediation and commutation efforts will continue to address S&P's concerns related to" http://www.bloomberg.com/apps/news?pica=20670001&refer=&sid=aGNP6vj7dsQE 8/18/2008 Bloomberg Printer-Friendly Page Page 2 of 2 mortgage exposures, Chief Executive Officer Michael Callen said in a statement yesterday. MBIA shares remain 79 percent lower than a year ago, while Ambac has fallen 94 percent. The S&P 500 financial stocks index is down 34 percent over the period. S&P's outlook for the insurers' ratings is negative. A negative outlook indicates a downgrade is more likely than an upgrade over the longer term. MBIA's outlook reflects the potential for home-loan losses to rise beyond S&P's expectations. Ambac's outlook reflects the prospects for reduced business" because of damage to its reputation from its losses, S&P said. New York-based Moody's Investors Service rates MBIA's main insurance unit the equivalent of three levels lower than S&P, at A2, and Ambac's unit one level lower, at Aa3. Earnings MBIA's second-quarter net inc n-te jumped eightfold to a record $1.7 billion, or $7.14 a share, because of a $3.3 billion gain on the declining value of its liabilities. New accounting rules allowed the company to log gains an the declines in its perceived creditworthiness. Ambac had earnings of $823.1 million, or $2.80 a share, amid a similar $5.2 billion gain. Ambac and MBIA have been losing business to Hamilton, Bermuda-based Assured Guaranty Ltd. and New York-based Fi na,-icial Security A_surarice Holdings Ltd. Ambac and MBIA had a combined market share of 3.2 percent in the first half of the year, down from 42.2 percent in the same period of 2007. As of June 30, MBIA had guarantees on $644 billion of debt, according to company presentations. Ambac had $487 billion and FSA $443 billion. To contact the reporter on this story: Judy Shcni in New York at jsher ;01 1 ornberg.net Last Updated: August 15, 2008 16:28 EDT a F : • *14i(CEIRMI IN, r Terms of Service I Privacy Poli=cy I Tr ic`emarks http://www.bloomberg.conVapps/news?pid=2067000 I &refer=&sid=aGNP6vj7dsQE 8/18/2008 Bloomberg Printer-Friendly Page Page 1 of 4 Bill Ackman Was Right: MBIA, Ambac on 'Ratings Cliff' (Update].) By Christine Richard June 18 (Bloomberg) Bill Ackman was right: the world's largest bond insurers aren't worthy of a AAA credit rating and may be headed for the bottom of the scale. Ackman, the 42-year-old hedge fund manager who says he stands to make hundreds of millions of dollars betting against 1481A inc. and Ambac Fi _riciai C-roap Inc. if they go bankrupt, will tell investors at a conference in New York today that losses posted by bond insurers may threaten to breach the capital limits allowed by regulators, making them insolvent. That once-unthinkable scenario would trigger clauses in $400 billion of derivative contracts written to insure collateralized debt obligations and other securities, allowing policyholders to demand immediate payment for market losses, which have reached $20 billion, according to company filings. Downgrades of the insurers would cause a drop in rankings for the $2 trillion of debt that the companies guarantee, wiping out the value of the CDO insurance held by Wall Street firms, analysts at Oppenheimer & Co. said. ' ' Given the volume of credit-default swap contracts the industry has written, there is a real element of a ratings cliff across the bond insurance sector," said Fitch managing director Thinmas Abrt;zzo, the first analyst to strip MBIA and Ambac of their top ratings. Ambac said today it asked Fitch to remove ratings on all of the company's subsidiaries. MBIA asked Fitch to stop assigning a financial strength rating in March. 17 Levels CIFG North America may fall first. The company's credit rating has been cut by 17 levels to CCC from AAA by Fitch since March because of concern it won't be able to make payments on $57 billion of the contracts. Ackman said CIFG provides a road map for what happens to a bond insurer when its capital is depleted." Ackman, whose $6 billion Pershing Square Capital Management hedge fund in New York returned 22 percent last year, began betting against bond insurers in 2002. In his report ' ' Is MBIA Triple-A?," Ackman was the first to say the insurer's use of derivatives to guarantee debt threatened to drain capital. MBIA, of Armonk, New York, Ambac, Security Capital's XL Capital Assurance and FGIC Corp. also have guarantees with similar clauses to CIFG that may allow policyholders to demand billions of dollars if the companies became insolvent, according to company filings. CIFG, XL Capital Assurance, and FGIC's insurance unit may all fall short of regulatory capital requirements by June 30, according to Robert Haines, an analyst with CreditSights Inc. in New York. 'Highly Theoretical' Downgrades may cause C-Rig", up Inc., M=-Frill lWynjh 1 C C. and UB52 AG to write down the value of insured-debt holdings by at least $10 billion, according to Mere&th Vjhitnr_-y, an analyst at Oppenheimer in New York. Banks and insurance companies would also be required by regulators to hold more capital to protect against losses on lower-rated debt, according to analysts at Charlotte, North http://www.bloombcr(y.comlappslnews?pid=20670001&refcr=home&sid=ayw26W322L2A 8/18/2008 Bloomberg Printer-Friendly Page Carolina-based Wachovia Corp. Page 2 of 4 CIFG is working on a plan to bolster capital, spokesman Michael Ballinger said. Because MBIA has a surplus of $3.9 billion, insolvency is ' ' both highly theoretical and extremely unlikely," Kevin Brew-in, a spokesman for MBIA said in an e-mailed statement. Vandana Sharma, a spokeswoman for Ambac, with a $3.6 billion surplus, declined to comment, as did Security Capital spokesman Michael Gormley and New York-based FGIC's chief risk officer, John Dubel. Insurers, including MBIA and Ambac, expanded beyond municipal debt into insuring CDOs, which package pools of securities and slice them into pieces of varying risk. The move was criticized by Ackman, who said it may ultimately bankrupt the companies. Pershing Square In January, Ackman, who started a hedge fund after working at his family's commercial mortgage brokerage, estimated MBIA and New York-based Ambac faced losses on home-loan securities of almost $12 billion each, a claim the companies disputed as recently as February. Ackman said he took an interest in MBIA after asking a credit-market trader which companies didn't deserve AAA ratings. That led to his report and his decision to take a short position in MBIA and Ambac stock, selling borrowed stock, expecting to repurchase it later at a lower price, Ackman also bought credit- default swaps on MBIA and Ambac debt. The swaps would rise in value if doubts about the companies grew. Pershing Square profited as MBIA tumbled 91 percent in the past 12 months and Ambac plunged 98 percent in New York Stock Exchange composite trading. Si-cu: ity Capit-21 is down 99 percent. Investor Bets Instead of writing standard insurance policies for the CDOs, the companies provided guarantees in the form of credit-default swap contracts, financial instruments that allow one party to assume the risk of a security defaulting in exchange for a fee from another. The contracts were designed to mirror insurance policies, said Bab Mackin, the Albany, New York- based executive director of the Association of Financial Guaranty Insurers. Unlike insurance, the swaps include so-called termination clauses that can be triggered if a company becomes insolvent, Mackin said. The feature requires insurers to compensate CDO holders for any drop in value, or mark-to-market loss, on the securities. Moody's wrote in 2006 that the companies were ` 'well insulated from liquidity risk," because credit- default swaps ' ' protect the guarantor from ever having to pay claims on an accelerated basis." Moody's spokesman Akbbas Qaslm declined to make analysts available for this story. 'Serious Consequences' The credit ratings of some CDOs have tumbled so far that the insurers have recorded combined unrealized losses of at least $20 billion, Some companies' termination payments would eat up all their claims-paying resources, according to filings and rating company reports. ' 'It doesn't make sense for companies and regulators to have gone knowingly into this, given the very serious consequences," said La vrence Hamilton, an insurance attorney with Mayer Brown LLP in Chicago. ' 'At the time, the possibility of a bond insurer becoming insolvent seemed so remote." If a company's surplus to policyholders or assets over liabilities falls below zero, it's considered insolvent under New York State Insurance Department rules and would be taken over by Superintendent Eric Dinalie, unless it comes up with a plan to correct the impairment, Deputy Superintendent Michael Moriarty said in an e-mailed statement. Moriarty wouldn't comment on the likelihood of the department taking over the companies under that http://www.bloomberg.corn/apps/news?pid=20670001&refer=home&sid=ayw26W322L2A 8/18/2008 Bloomberg Printer-Friendly Page scenario. 'Extremely Alarming' Page 3 of 4 In a June 8 report, CreditSights' Haines wrote that statutory surplus levels at some of the monoline financial guarantors are extremely alarming." Companies may avoid making the termination payments by raising capital or reducing loss reserves. CIFG and FGIC are seeking ways to raise capital, they said. MBIA and Ambac have said they don't anticipate losses will be large enough to erode their surpluses. Even in an insolvency, regulators may step in to halt the payments or banks may decide not to demand compensation, Abruzzo said. ACA Financial Guaranty Corp. has reached five agreements with banks since December, allowing it to avoid posting collateral on CDOs it guaranteed using swaps. ACA has been cut to CCC by S&P. Fitch is assuming in its ratings that regulators will allow the payments, Abruzzo said. CIFG, FGIC CIFG, based in Hamilton, Bermuda, had a surplus of $80 million at the end of the first quarter, down from $103 million, according to filings. It set aside more than $100 million for losses in the first three months of the year. Security Capital's XL Capital Assurance booked about $200 million of losses in the first quarter, shrinking its surplus to $167 million, according to company filings. SCA, based in Hamilton, Bermuda, wouldn't be able to cover termination payments on swaps if they were triggered, according to regulatory filings. XL is rated BB by Fitch, A3 by Moody's and BBB- at S&P. FGIC had a cushion of $366 million at the end of March, compared with loss reserves of about $1.8 billion taken in the past year, according to company filings. FDIC is rated BBB by Fitch, Baa3 at Moody's and BB by S&P. MBIA and Ambac may need to raise capital to avoid becoming insolvent if loss reserves continue at the recent pace, Haines said. The companies were both cut to AA from AAA by Fitch and S&P. Moody's said on June 4 that it probably will also reduce its ratings. S&P spokeswoman Mimi Bar stir declined to make analysts available for this story. ' Nightmare Scenario' In the past two quarters, MBIA's insurance unit set aside reserves of $2 billion to cover losses on $51 billion of guarantees on home-equity securities and CDOs backed by subprime mortgages. Ambac booked about $2 billion of loss reserves, leaving it with a statutory surplus of $3.6 billion. It guaranteed around $47 billion of CDOs and home-equity debt. While both companies are above the regulatory capital requirements, S&P said in a February report that in a ' ' stress case scenario," MBIA may be forced to pay a total $7.9 billion in claims on a present-value basis and Ambac may be forced to pay $6.2 billion. ' 'That's what puts these companies into the nightmare scenario," CreditSights' Haines said. To contact the reporter on this story: Christine Richard in New York at ~ ~ iz~a> d~C~hl lon_berg.r ei Last Updated: June 18, 2008 14:32 EDT a http://www.bloomberg.cornlapps/news?pid=20670001&refer=home&sid=ayw26W322L2A 8/18/2008 Bloomberg Printer-Friendly Page a Moody's Cuts MBIA, Ambac, Taking Last Aaa Ratings (Update2) By Christine Richard and Bryan Keogh Page 1 of 2 June 19 (Bloomberg) Moody's Investors Service stripped MBIA Inc. and Ambac. Finansi,l Corp, of their Aaa, following Fitch Ratings and Standard & Poor's, ending the bond insurers' run of at least two decades at the top of the ratings scale. MBIA's MBIA Insurance Corp. unit was reduced five levels to A2 from Aaa, New York-based Moody's said today in a statement. Ambac Assurance Corp. was lowered three steps to Aaa, Moody's said in a separate release. The outlook on both is negative. The downgrades end more than seven months of speculation about whether the bond insurers would keep their top ratings at all three firms. Five of seven companies lost their top ratings as projections for losses on securities backed by home loans surged and confidence in the companies collapsed, causing municipalities to shun their insurance. The downgrades span more than $2 trillion of debt sold by issuers ranging from school districts and sewer authorities to Wall Street firms. MBIA's downgrade reflects its ' ' limited financial flexibility and impaired franchise," Moody's analyst Jack Dore~r said today in a statement. Ambac has " significantly constrained new business prospects" and likely will incur more losses, Dorer said. Armonk, New York-based MBIA and Ambac of New York both said they were ' 'disappointed" by Moody's decision. ' ' Out financial condition is very strong," MBIA Chief Executive Officer Jay Rroiivn said in a statement today. ' 'We remain committed to maintaining capital strength for our policyholders and financial flexibility." Ambac said it can manage through the current credit crisis." CDOs The bond insurers lost their top ratings after straying from the business of backing municipal bonds, which rarely default, to guaranteeing more untested securities such as collateralized debt obligations, which package pools of securities, including those backed by subprime mortgages, and slice them into pieces of varying risk. Further downgrades may cause Cil:igr oup inc., Miarrill Lynch Co. and UBS AG to write down the value of insured-debt holdings by at least $14 billion, according to Memdith Whitney, an analyst at Oppenheimer & Co. in New York. Banks and insurance companies would also be required by regulators to hold more capital to protect against losses on lower-rated debt, according to analysts at Charlotte, North Carolina-based Wachovia Corp. MBIA and Ambac were once the top two insurers of municipal debt, a mantle that has been taken by competitors Financial Security Assurance Holdings Ltd. and ASSLIFcd Guaranty Ltd. Financial Security insured 64 percent of all municipal bonds sold in the U.S. during the first quarter, according to Thomson Reuters. Losses Combined with a slump in the value of derivatives contracts used to guarantee CDOs, the lack of new http://www.bloomberg.conVapps/news?pid=20670001&refer=finance&sid=armNigOgUyiU 8/18/2008 btoomberg minter-rriendty Fage Page 2 of 2 revenue weighed on the company's credit ratings. Ambac reported a $1.66 billion net loss in the first quarter after $3.1 billion in charges for subprime- mortgage securities that it insured. MBIA had a loss of $2.4 billion as the value of derivatives it sells to guarantee debt tumbled $3.58 billion. Moody's said it was reconsidering downgrades on June 4, citing a drop in demand for the companies' insurance and their limited ability to raise capital. In response, MBIA and Ambac said they disagreed with the assessment and had no plans to raise more money. A day later, S&P removed the AAA insurance rating from both companies. Moody's and S&P first put the ratings of Ambac and MBIA under review in January, citing the deepening housing slump and rising losses on securities backed by home loans. `Strongly Capitalized' MBIA and Ambac then sold a combined $4.1 billion in shares, bonds and convertible debt in the first quarter to save their ratings. Moody's affirmed the Aaa ratings on the insurance units of MBIA in February and Ambac in March. The capital wasn't enough to keep top rankings from Fitch, which cut Ambac to AA in January, and MBIA to AA in April. As the slump worsened, Moody's and S&P took a second look at their assessments. In the past two quarters, MBIA's insurance unit set aside reserves of $2 billion to cover losses on $51 billion of guarantees on home-equity securities and CDOs backed by subprime mortgages. MBIA is $2.6 billion short of its target capital level for an Aaa company, Moody's said. The rating company also said MBIA's decision to retain $1.1 billion at its holding company was ` ` indicative of a more aggressive capital management strategy" and contributed to the extent of the downgrade. Ambac is $225 million below the Aaa target level, Moody's said. At the current rating, Ambac has a ` `substantive capital cushion," Moody's said. MBIA is also ` `strongly capitalized" for an Aa rating, Moody's said. To contact the reporter on this story: Christine Richard in New York at ~~:_h~ ~!~[bloo~berg.,,et Last Updated: June 19, 2008 19:20 EDT a Terms of Service I Privacy Po=icy i Trademarks http://www,bloomberg.com/apps/news?pid=20670001&rcfer=finance&sid=armNigOgUyiU 8/18/2008 Worst 10-year performers: MBIA takes a triple-A nosedive on risky mortgage debt - Blog... Page 1 of 2 Bj©ggingStocks- Posted Aug 1st 2008 5:OOPM by Elizabeth Harrow Filed under: Major movement, Bad news, S and P 500, Housing, MBIA Inc (MBI) In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade what went wrong, and what happens next. (See all 25). While financial-services firms have been dragged down as a group for more than a year, few have flamed out with the spectacular ferocity of municipal bond insurer MBIA Inc. (NYSE: MBI). In tact, among equities listed on the S&P 500 during the past decade, only one stock has suffered a more severe plunge in share price. What went wrong? At no. 2 on our list of SPX slackers, MBI lost 91 % of its value during the decade that ended June 30, 2008. The stock peaked at $76.02 in January 2007, which marked the last in a series of higher highs for the formerly uptrending security. MBIA's troubles first started in January 2007, though its issues at the time would pale in comparison with later challenges. Then, the company agreed to pay $75 million to settle civil securities-fraud charges by federal and New York State authorities. MBIA was accused of making secret side deals with reinsurance companies to avoid stating a $170-million loss in 1998. As part of the settlement, MBIA said it would restate earnings from 1998 through 2004 and improve its business and accounting procedures. Pressure ramped up on MBIA when the credit crunch rattled world equity markets in the second half of 2007. The company insured collateralized debt obligations, or CDOs, saddled with subprime debt. As a bond insurer, MBIA was almost completely reliant on its triple-A debt ratings; after all, if you can't get a guarantee from an insurer, what's the point? The triple-A ratings were never questioned in the company's early days, when it insured municipal bonds almost exclusively defaults were rare on these vehicles, to say the least. However, the CDO situation involved an entirely different risk level. By mid-2007, major investment banks had already written off billions of dollars in CDO losses, and investors began to wonder why MBIA should be any different. Last December, Moody's said it was placing MBIA's triple-A ratings under review for possible downgrade, The ratings firm said that MBIA was "at greater risk of exhibiting a capital shortfall than previously communicated," thanks in no small part to the $11.09 billion in subprime mortgage debt to which it was exposed. Now fully under fire, MBIA announced news of a $1-billion investment from private-equity firm Warburg Pincus. Last January, in a scramble to save its triple-A status, the company slashed its dividend and said it would sell $1 billion in debt to raise capital. The amount the bond insurer planned to raise seemed woefully inadequate in comparison with its losses; in its quarterly earnings release that month, MBIA reported a $3.5-billion write-down on its credit derivatives portfolio. http://www.blog0cringstocks.conV2008/08/01/worst- l0-year-performers-mbia-inc-takes -a-tri... 8118/2008 Worst 10-year performers: MBIA takes a triple-A nosedive on risky mortgage debt worst w-year performers: MBIA takes a triple-A nosedive on risky mortgage debt - -Blog... Page 2 of 2 The pressure was also rising on ratings agencies. Many on Wall Street accused the firms of turning a blind eye to the heightened risk inherent with certain types of CDOs, thereby leaving institutions and investors vulnerable to massive losses. Moody's and Standard & Poor's capitulated, to an extent; both firms vowed to review MBIA`s ratings. However, both eventually affirmed their existing opinions. Meanwhile, Fitch Ratings was not convinced, and stated that MBIA needed more capital to support its asset-backed securities. MBIA's response couldn't have done much to boost investor sentiment the battered bond insurer asked Fitch to stop issuing credit ratings altogether on its insurance units. What next? After admitting that its ratings may have been handed out in a rather Pollyanna-ish fashion, Moody's attempted to save face by dropping MBIA's rating from triple-A to A2 in ,tune. As a result, MBIA found itself selling municipal bonds to raise cash; the downgrade triggered a collateral calf of $4.5 billion and termination payments of $2.9 billion on guaranteed investment contracts. A fund-raising bake sale seems like a none-too-distant possibility in the future. Most recently, MBIA said it had approximately $1.15 billion in exposure to three securitizations of loans backed by IndyMac Bancorp, which recently failed. In its upcoming earnings report for which no date has yet been confirmed analysts expect an operating loss of 94 cents per share. Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on Scha effersResearch. com. Tags: bond insurer, MBI, MBIA Inc., Mbiainc., Moodys ratings, mortgage debt Sponsored Links "Prepare To Be Shocked" Amazing Chinese Weight Loss Secret. As Seen On CNN, NBC, CBS & Fox News. www.wu-1"Source.com Alternative to Open Back Surgery Minimally invasive, corrects most spinal disorders, 21 st century laser techniques, outpatient surgery. www.laserspineinslitute.com "Murder Yellow Teeth" The Secrets Dentists don't want you to know about Teeth Whitening! www.best-teeth-whitening.com Buy a link here All contents copyright Oc 2003-2008, Weblogs, Inc. All rights reserved http://www.bloggingstocks.com/2008/08/01 /worst- 10-year-performers-mbia-inc-takes-a-tri... 81 i 812008 BloggingStocks is a member of the Weblogs, Inc. Network. Privacy Policy, Terms of Service, Notify AOL C O U O J O 0 J t v G O U J a r 4 J { O J { L x ^ ' C ^ C on. kE~ L u- 2 V G' J U L C O r i ~ h .O ; ,s C C ~ cr3 ` o .~Lu ~ ~ ",E o c c n c E `A F" J a o o ~ ~ ~ E c n .S 3 _ J L G UG -D 3 O 7 0 C C ~ a ~ A' J j h LU•n> o P N C+ Q 3 { r- ,n h z° V CJ T a C .+J. 'yam N Q N J q r ? a K Y a~ N C+ ~ L U°- Z N N n L C z~ Z ° .Z O y J { W z ras. O 4 v ~ Z :J Q . C O = 2' .n u ~ u r' o n a. t j _ Y ^ tC~C K J 3 n- C c J .V f GLr C - - ~ N ~ J 3 i LL) U Y. C r vv. ~ J ~ C : n ~ b C- c 0 i. - ' J L ? u ~ _ O 7 C 04 V y y ,gin x ~ ~ v J O J V j Q J V~ j 12 IQ R r U ~ O ~ r• J ~ _ C u~~ a U O~? -G v~ S :u G o O c O _ i T~ C C- 'v .L Y :c y w c 3 C a O C v J Y- J.= r u 52 ~.?Yi '~~c c 3 U F vim.' d C r Z. U v <~COCJ V~ U 40 ~ac:c zz~~~Z 7ZC ~~zQn J G .a C ^ r U D n n? 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J o 0 C, , y ^d C U ~ ti C F .i G G n h O LO Y - F ° ° LO ~ cll ~ F m - ~t r1L j - LU L U r 3 ° ..L' E j J Cif F n-3 J~~ r J U L r- O` J , O J1 rv- > = U r J V YL T O F= F - F V n 'n 4 2 'EL 78, -U •.I T ti ~ J *C~ ^ G_ O U C n ~ Q C G~ E X ~ ~ ri .E c ~ n o < O L a. 'r - O m J C J c C f C- -5 E Q j n y J OxG~? ~~V3 O ~'=UN d4 ---8 y n ?u7 v ~ w f nl R .O 'yJ ^ G Q i E J = - 3 w d i ~ n 's3. ~ u n 4 v fl o~ g a o ro ` F s 7 j r ~ - o e .a ~ ~ CC] A C C ~ C J 0 en's C ' n J j L 1~ m~ J j > O-` F '4 J S9 y J J G v ' u V T- .3 = L L M _ V ~ _C.J Jl J y C G _ a ~ C -0 ~ _Jl ~ 'L - ~ ~ a ' J ° ~ G j cs ~ Y m V [tl .C J n > > v Jr` J j X r Cj - ' ~ j C _ ` C C 'J TJ C.- y, U J 0 .L G LJ V 0. • C ~ G C-z G j 3 U 1. 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L n1 ^ ~ n O _ u U i" C F U V K 7 4 L V1 f O 7 F J a 12 1 J J ;5 j O~i J O r _ 0.6.- U C J ca J r J J 7z 16 i2 E-: p 'd C - c 7z rj) G PU _ R 'J ~ ~ ~ ' _ C U p .P • O n 'C G v E y ~Q - .C r^ r F . C ~ 7, ch -j G 'D ''-y L j T S ~ Q< CL j G~ N F~~ G~ J O Z n rJ a r ? n n _ L-. 3 E L 'JJL` J L~ '4 y' a '+~C j u - ~ O ~ 3 p 3 p _ ~ > ~ 3 X C X F ? cc7 C :Y V ~ . 50 r F - J C C T p •J C c C3 _E J ,y L' J_ no a J- J 'j O ~ C ? y ~ - _ - ~ ~ J ~ - O n ~ r J ~ ~ ~ r F nXi n J cG C T . ^ ~l zip j J J C 72 • ~ C - 1 J^ a v s ;3 2 ~ y e 13 n o o is n a r n C G J.. V 3 ^ r J, r n C J V F U n~ \ V " x n CNN cyU,° :p>^~'m J J v ~ n T .J m ` X V G-GS Y 4 ^ X O 73 y ~ r A ~ 'J u Q-- U n ~Q F- o---' <t^ c K~~ ~ ~ f Y h G CI C U ^ v J 3 D .1 2 33 -P ~•WA c v ='e 9 3 v y J ~ 3 a J -M c ti j,c c L :2 A J ? Z x U 75 7 4 e D X C ^ .J C u -U N d L A C O u a o g d C 'G Y. C]YS C JS'r• C Q O C `LG p - r o a n - •L ~ c3 V vl ~ .~j .n T u 'J - C raj u ~ n 'O ~ o a 3 = Q ~ = c ss _ = c ^ yam.. 5? ~ ? ~ A ~ j ~-'mss e"~ c? v 7 ~V =Q~ ~.>-3= ^ i1 ~ n Y-~ u U K n j C _ r3 M ' .p J~ ~ ~-.J ~ COY U ~ u Q yJ ~ ? J v ? E 0 !Gf] ~ ~ ~ - G ^ O 7 ~ 14 •p y F^ - o < n M O v V .VG - C G V J_ n F S'E a ."gyp c n 2 y ~ ~ w w - J i r o- ' = E > J J ~ G y 3 ~ ss G ~ J i G C r p ~ ~ ~ - j G J j .O •f. 7 r K ET` u ~ [ C j c V ^5 J n •n C 6 a so . r/ui r G n^ 3 O 4-2 G O U j L J 11 V) J c V : ' , ~ . a n _ z .3 G 3 ti - - .S r C G n 1 O .rGj _ L^e r 7 < n y ^3 O W, C C G F- 0 ? V% h 6 O :r i C p cn 'a~i ^ y y 'J F c Q C 2 ' c - ._Jj C -Fi j J j- U r - Q T = V J n -y J 7 3 'J- j _T -GJ" ;n iJ ~ J j +U N Ti .II _ '.Jj 7 - C -J.' ~ - _ 7 5 . Vn r C~ J .D r f S 7 • J - S + j V , G .'Vj . G J Q ? J _ 'JC , e5 Q i L~ T: ^ > Jp r -ni E - C - _ _ _ - - -e -52 = 47- y 's p _ y C " U C - ..Y' r u "J J E~ .G v J. } J X ? r ` _ .J ~ J G ~ ~ C t 7 - r _ L n ~ ~ ~ C - .J .r .L 'L t ~ ~ C = v _ 1'S - J ~ J O O P P .2 '15 . O j ~ .-4 y i n r L T J . ^ n 3J J J= ~ ,O ~ . , „ O ° r ~ 7uy ~i- : 5 ~ no ;5 ^ J. u O - 22 ti .r A • C .J U G ,O s' 9 J - ) ~ ? . ' 3_ ) ~ s ^ ~ . ~ P . p" j u i ~ ~ C ~ K 21 . ~ 6 _ 5 181 . . r ~ 3 ..C C. ~ n 1 ~ y 1 r J ~ G t ..uj •.j ! ~ ~ p G SJ ~ j ` f.] ~ ~ 'J ' 3 G cC3 y T n 1 ~ J rj) G y n y . 3 ? x _ U ~ _ _ ~ ~ ~ ~ u cc ^ r Y c ~ ~ ~ ~ 0 O j G ~ ^ G' ~ r~ .7 ~ ~ C F r ¢ _J r v cCi i + " 3, "C ^ :J vi ~ C~ -11 = J F O G C v : n w n ~ ~ 1~ `y C ~ ~ ~ A , n L .i cG 3 G ) L A r n ~ - _ •i,~-. C C U n ""n ~ . ~ Cl. ,n ~ ~ J - C ~ U'. ~ _ n r _ J U U p! n ~ J~ u ~ V ~ C r y .J- C~ U~~ i J ~ ~ u V V s , ~ ~ L ~ h - N ~ D L O ' 3 U n u .n J P U G U M.^ O j P O n ' . C ~ p vj ~ "J G =n M1 y . O L n 6 ' J C j C -Jl V ^ c .12 .r ' ^ in m >7 G o _ ~ -7 ° Y G G `m q N = q ci 9 c ~ C . Z. , ss r .5 r u n as 5 v -pc 4 s n n c J 3 G 7 ~ x p ? L s e .n S ° c ` am T • _._r- _ A^ U] n w j J..V U U= c i O U c c G ,S R LO - -z4 7-5 9 3 u LEI v = o a - s s n J U { J n, j , .J U ~ G C w J¢ _ 51 7,2 n C u S ~ ~ ~ ' Q U , - J cG' G z~ ~ F ~ J G ~ i c. ~ Z - n O J V ~ ~ r s ~ ~ ~ ~ 3 J 3 - Y, o Y 75 -E `u J E :,L F c 9 2 4 E T cs ,7' , ~ c7 °rnc n~ G ,'nom G C CJl ^ ~ ` J L 'A .0 ~ •o y. ~ J ~ 7 - w ' n c 3.3 y -02 F r; t2 6 E L - 75, 21 -v c v o v o - ci ^ ~ c g n[ "J ~ T G ~ .T ~ r. _O JI J n ¢ ~ T ~ O :.(1 u y U c ~ ~ ~ ^ Y m L . y J G r O ^ U C C ? O n O G Y ~ - _ G V J .3 j X. z: 0 _ 2 _ ~ ~ F C G p J G ~ .y ~ M 3 .J ^ ~ W ~ ~ 4,2 ° o ° o - h o - 3 ° o E a ~ Q u 75 _ F _ - '2 E p c F j C J J .'nl j q .j G_ - G' J J t- j C J 1 S J _ U r '7 -C J r 7 m L n _ J C a T- .•Jj C G G C :1J 7 C G J z ] C' "J 'J 75 [ C] O _ C r 7 ; " 4 U J i G G J JI 0 - T G -7 u ~ ~ t O _ G r n v` 7 J y j C U J i 9. n-0 j = F Z • ] '•J, C J Iz Il r2 0- :E 73 rJ - C 7E 9 ' n J --2 _ C _ _i J = _ - T r y j - ' c 1 N - ✓ , sJ : 'a ) G j = G. '3h J F C ~ J^ U . - w .G , . 7 ~5 co to 's 75 2 yj =G - _ ~ N J ~ - Y J ~ • n a G.. J J Y = - ) J 3 f C 3 _ .Jc ~ T n nq, > O e s .y n ~ e F 3 ~ s 'J J ^ L ~ w ~ ^a .3 - Q F J_ G -n, A= J .J r ~ ~ C ~ T , j O F O ~Z a 7 J L J O w. +y n C y' F O _J 1= J G _b j UDC n~..C~ J~~.'J y•j "3?.G~'G C n ?_~~~J,"~C p E c= ? p o a r a ~n ,n ~ ~3 X 3 0 ~ o~? z 3 c.>_ r• o - j n ~ ~ ~ r ~ y W n Wl :J ^ y T = ^f3 ~ ^ ~ ~ ~ :y T - ~ J J FGl i 7 0 0 3 %r o o o ` S F 3 Z G u c •y -d .-Ji G v ti c ,J, G K F O J__ 3 c-. ; y J '6 «3 J= I _I'. , j T y - p O "J 'rJ, U~ :i 'n J 'JS v r~ rv U C C .t.. U U p~~ J G~ ~ a j~ G m a ~ ~ ~ O ~ .C ^ J ~ J ~ G ? a U ~ G j ~ U ~ r ~ p ~ C_ •L] „ G 75 - p C j T ~ j K .p- j> E n 3 r U :J ~ J C- Z Y O n F -C :~~j J E ,pL'• U m b s p 'y G K p n a - r c] s X ^no~« 3 a c :am E a p' o 2 U •a w° :7 7 o vi o = 0 J r ° .`^-Q s V 3 - cy 9-7 J N ac3 E y G T G 'J ^JJ ' h O _ W U nn p G co E q -Y - C d V~ J~ V ~ J~ -n - f i0 U U L C v G. f - G p V .c¢`oo.oFUc~°~.Jb 'J rv° n c ti a a E c' ° UL' a c G c .•~J. U E ~ T~ - K ~ ~ ? _ E~ O U O s 3 O C ~ O C~ o o - U .C ° v c G n .q"? L' = ? c ra n E-'. Y O ~ ? h C •i G U J C~ r) E J Q ~ ~ v n ~ j C yU 4 p r a E J c .o iii = 3 q x^~~ r❑ t G o u" c~ 1 n J Y o o v c' - 4 F _ ❑ .u a E ° e 3 r .n j C.G _ 7 U G p- - ~ 7= J J.Ej T T U T C G ri n n J cC U 21 c3 C U, 21 '^TS n r , J^ ~i y p? j u p L C a j p• _ ^ ^J , y ^ L 2 _ o J 7, ' _ .rte, u > ° y = = o 0 c, n Q o :D 7, 7L ED 15 P n 6 O - 3 a = a 3 r ' r . _ ° m v • 2 G J - o - = a a ~T tR go- ;j 2 S G C_ - p j U- J j U n y _ > 5,1 N ~ J -J r G - oc .2 -2 - y c c n J Z C v -j 72 to ~5 ;z- H J - 'r~J J -f. _ w e .C C •n p C G p r y J L S T y V ~ u ~ •'~S ~ ~ J r T.~ cC V) •`C~ C j J n J c c-0 v _p ~ L ~ J G~ ~ n ~ E5 7- a; _ l y v'j r = 'fi'r G 8-5 U - L p ~ n = . 7 .r C C y x k. U J -3 •v G F r ~ E d ~ ~ ~ 5 ur r ~ ~ f1. tii .y w ~ w a e ~ o c ~ C F n~ ~ c w s r w m 12! 'R U ~ A ~ rV. ` C ~ O ^ Y ti L V1 ~ ~ ~ J • 0 O :E C. -j O n n p - 0 c 'u' •ti G T" - p~ j G r C - 2.2 u C 9 G C 3 R7 ' J C' - 0 C E: no c - G= J_:3 -~C -Cr JJ 75 2 =M ~~A G~7 s - 2 t y F 5~ 44 ~2 g J so 1 J F to a n n - - 4 n c G c y r r r _ _ . MBIA to Pay $75 Million in Settlement - New York Times Vic New No rk a~iw e5 January 30, a007 MBIA to Pay $175 Million in Settlement By THE ASSOCIATED PRESS Page 1 of 1 °~.-rli EF FRi Eri Li ?U9M_7 5F 14E-a;;E3 V WASHINGTON, Jan. 29 (AP) - MBIA, the large insurer of municipal bonds, has agreed to pay $75 million to settle civil securities-fraud charges by federal and New York State authorities over what they said was a sham $170 million transaction in 1998, the company and regulators announced Monday. The settlements were the latest action to come out of wide-ranging inquiries in the United States and abroad into so-called finite risk reinsurance - which regulators say is sometimes used improperly to help companies artificially inflate earnings without a real transfer of risk. MBIA signed one accord with the Securities and Exchange Commission and another with the office of New York Attorney General Andrew M,_Cuomo and the New York State Insurance Department. The company agreed to pay a total of $65 million in civil fines, restate its earnings from 1998 through 2004, and make improvements in its accounting and business procedures. The regulators accused MBIA of using secret side agreements with two reinsurance companies to eliminate the risk to the companies in the transaction. They said MBIA used the deal to avoid having to book a $170 million loss in 1998, the first major loss in its history. The $50 million civil fine against MBIA with the S.E.C. will go to a special fund for defrauded American investors set up after the corporate scandals of 2002. In the agreement with Mr. Cuomo's office and the insurance regulators, MBIA is paying a $15 million fine and $1o million in restitution to MBIA shareholders. MBIA, which is based in Armonk, N.Y., also agreed to hire an independent consultant, who began work last summer, to review its accounting and financial reporting. The company neither admitted nor denied the regulators' accusations under the settlements. The $17o million loss stemmed from a July 1998 default on municipal ponds that MBIA had guaranteed for a Pennsylvania hospital chain, the Allegheny Health, Education and Research Foundation. To conceal the anticipated third-quarter loss, MBIA's senior management devised the scheme to obtain reinsurance to cover the value of it and thereby convert a loss into a reported gain, the regulators said. Gooyrioht 2007 The Now York Times Comoanv Fiivac Py olicy Search I Correctiens, Ras First Look Help I Ganact Us Work for Us f site Map http://www.nytimes.com/2007/01/30/washington/30mbia.htn-1? r=1&pagewanted=print&... 8/18/2008 A Mortgage Meltdown for MBIA - Barrons.com MONDAY. ;1}nit 2S, 2967 FEATURES MAIN A Mortgage Meltdown for MBIA try rO\:1-MAN H. LAING1 MORE%RTn'1.LS ny.tr-MbAt The giant ritunicinal-bond anti corporate-debt insurer could get slammed byfrtrther• subprime- mortgugefttllaut, is its triple-A rating at risk? DESPITE ITS REPUTATION FOR somewhat slipshod underwriting, giant rtxrszr - municipal-bond and corporate-debt insurer MBIA seemed to have allayed investors' concerns of late by working its way out of some tough situations. ;3 ?RINT tr.1AIL 1 For instance, an Impending debt-restructuring will defer or perhaps eliminate the insurer's obligation to make future principal and Interest payments on eles 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 ~ RFFRINTS - i exposure of securities backed by manufactured housing, $2 billion of rental-car crr sss securitizations, and various equipment trust certificates of the formerly bankrupt carriers Northwest and US Airways. The fact is, few financial insurers a re better at restructuring problem deals or stringing out repayments of deals gone bad. Yet trouble may be brewing in MB1A'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 $176 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 tosses from the blowback of the subprime mortgage crisis, through the billions of dollars of subprime-mortgage securitizations that MBIA has insured. The Issue was first raised by hedge-fund manager Bill Ackman of Pershing Square Capital Management at an Investment conference. In a presentation Rr° 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 M'aiA nsUr s deeoeioas principal on municipal bonds and other forms of debt. ~3113!?raiiz~ll debt Ob 4i} funs backers by Sub9d1; a loan. The peril is particularly acute because the company will have a narrow cushion of perhaps $506 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 $635 billion in par value against loss. And if woes of the subprime-mortgage market continue to wax as some expect, MBIA could sustain claims losses of more than half a billion bucks. The company is quick to play down such doubts, and it brushes Ackman aside. It points out to Barron's that Ackman's past intimations of MBIA's impending doom such as on the Chunnel project have come to naught. Ackman has sold large amounts of MBIA stock short, betting on declines, since late 2062, when he issued a lengthy negative report on MBIA and has lost money on the trades. Ever since, both sides have engaged in a jihad that has included attempts by each party to push the Securities and Exchange Commission and New York Attorney General into br$nging 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 stack (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, 2667, 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 tranchos, of MBS, including the tripie-A bonds that have first dibs on the flow of mortgage Interest and principal payments cascading down the payment waterfall. Page I of 4 http://online.barrons.com/public/article/SB 118256093145045455-TtD0a6UmUVQGApolp... 8/18/2008 A Mortgage Meltdown for MBIA - Barrons.com 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 COOS 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 COO 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 COOS it has insured were backed by subprime mortgages. The $2.4 billion of CDO9, in turn, fs 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°1. or so of the underlying mortgage pools of total collateral. So, if the cumulative collateral lasses mount to 7%, the holders of the triple-B tranches would torched. Once losses hit 100h, the single-A tranches also get snuffed. While in a IVIBIA 10% 1058 ~ T } patent Prlce jG7.5"S scenario, { } 52-We.kWqU- n,y J 7661 - t5(>,Oo more than Marko CUP ibil) 85% of an 3 - - 3 Earaings Per hare S MB5 i 2006 Y5.31 capital 2007E structure P/E-u7r ----'^,..__.-:^v would Bivl!lend YlPfd 2.2% survive E-Fora n se; =•.r-rr--<nr.: 9-ft. 100 M YARX I ndl,". So GO F M 1 -`+h~:TS: hl mall: i:G !nn-G. Intact, Abhuugh MBIA's stonA Iu cheap by some measures, it could take some lfits iron, the cumpany's subprime sLTV7111zdlofts of subprime;cans. A :ey [nuex rf sud, -'rmies has lallen smir 4014. since January. 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 trlple-B subprime MBS tranches has lost nearly 40-1 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 €oreclosure. 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 801n." 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, Rorida, 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 failing 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. fn 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 he all the more difficult because of the complexity of sub-prime loans, Page 2 of 4 http://online.barrons.corr/public/article/SB 11825.6093 t45045455-TtD0a6UmUVQGApo1p... 8/18/2008 A Mortgage Meltdown for MBIA - Barrons.com 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 ty pes 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 shoufd 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-0 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 1996 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. A'IB IA 0,0 - WrA) The full $170 million amount was made good by three 1JElycsa on lnne 3t European reinsurers. At the same time, MBIA entered into a 336U reinsurance agreement on future business with the same reinsurers, guaranteeing them nearly $300 million in future 7'` E i premiums over a period of years. Subsequently, MBIA insisted that the $170 million In loss payments and the $297 million In o future premiums wasn't a disguised loan agreement but two ' 2o- t b fid i d l h ? separa e, ona e re nsurance ea s. T e appeal of that "LL' 'e;d CS -06 'OT I 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 2s% 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 Far an independent consultant to review the company's auditing, compliance and accounting procedures and investigate some other possibly suspect MBIA deals. In a pasting 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 1996, 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 5200 million of that over the next eight years or so by prevailing on its insurance unit to guarantee two securitifzations of more than $300 million of Capital Page 3 of 4 http://onfine.bai-rons.com/public/article/SB 11825609314504S455-TtD0a6UmUVQGApolp... 8/18/2008 A Mortgage Meltdown for MBIA - Barrons.com 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 ernboidened 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. But that is highly unlikely. h1BIA is one of the rating Bottom Line agencies' biggest revenue sources. They are also loath to call into question their triple-A ratings on the $635 billion t It the subprime-modgage market worsens, MBIA par value of MBIA-guaranteed debt that's currently t could sustafn claims losses exceeding a halt billion ft books. It might have to issue more stock, diluting outstanding. A sudden markdown of that much debt i shareholders. 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 subprtme-mortgage market continues to unravel, the shorts might finally get a measure of solace. Page 4 of 4 http://online.barrons.com/public/article/SB 1 1 8256093 145045 155-TtDOa6UmUVQGApoIp... 8/18/2008 MBIA's $8.1 billion writedown shocks investors - Dec. 20, 2007 MMoney. . cold DECEMBER 20 2007: 3'35 ?Pf! --$Y Bond giant's $8.1 billion surprise That huge sigh of relief you heard from investors in MBIA after the bond insurer avoided a damaging downgrade? It didn't last long. By Katie Benner, writer-reporter Page I of 2 C PRINTTHIS Powered by i (3>ei~aL&Y (Fortune) Just hours after dodging a potentially I devastating downgrade from ratings agency S&P, bond insurance giant MBIA disclosed late Wednesday a massive $8.1 billion exposure to the same risky investments that have been wreaking havoc on Wall Street in recent months. It's unlikely now that MBIA can escape a ratings downgrade. The news could also jeopardize an offer by buyout firm Warburg Pincus to invest $1 billion in the beleaguered company. MBIA's surprise announcement could rattle Wall Street at a critical time. If MBIA is downgraded or fails to secure financing from Warburg Pincus, then the bonds it guarantees will be downgraded, likely resulting in more losses for investment banks and prolonged turmoil in the credit markets. Analysts said they were dismayed by MBIA's disclosure. "We are shocked that management withheld this information for as long as it did," wrote Morgan Stanley's Ken Zerbe and Yoana Koleva in a research note issued after Wednesday's writedown was announced. "This new disclosure completely changes our view of MBIA being amore conservative underwriter' relative to [competitor] Ambac." MBIA (MBI) shares were down more than 25 percent in mid-afternoon trading Thursday. MBIA, the-country's largest bond insurer, revealed late Wednesday that the $8.1 billion is backed by collateral debt obligations (CDOs) and residential mortgage-backed securities, whose value has fallen steeply since credit markets seized up this summer. Of the total exposure, $5.1 billion was written in 2006 and 2007, when Wall Street firms were inking some of the riskiest loans. The latest developments would spell even more trouble for MBIA and Ambac Financial Group (ABK). These so-called monolines have insured about $652 billion and $546 billion in debt, respectively, that could be downgraded and fall in value if those insurers are downgraded. Before MBIA's $8.1 billion http://cnnmoncy.printthis.clickability.conVpt/ept?action=cpt&title=MBIA%27s+%248.1+b... 8/18/2008 MBIA's $8.1 billion writedown shocks investors - Dec. 20, 2007 Page 2 of 2 disclosure, S&P estimated that MBIA faces $3.1 billion in losses on securities backed by subprime mortgages. MBIA said it was establishing loss reserves of between $500 million and $800 million as protection against losses from its insured bonds. But that amount is woefully small compared to the value insured investments now at risk of crumbling. Too little capital combined with high-risk exposure is a problem that dogs nearly all of the monoline insurers, most of which are facing downgrades by S&P and Moody's. MBIA would not be the first bond insurer to be downgraded. That honor goes to ACA (ACAH), which on Wednesday had its investment-grade A credit rating slashed to the junk rating CCC by S&P. Economists and Wall Street analysts worry that bond insurer implosions will ripple through the financial system as waves of bonds are downgraded and investment banks are forced to take more writedowns as a result. (See "Bond insurer defaults threaten big banks") In part to stave off a meltdown, buyout firm Warburg Pincus offered Dec. 10 to buy $1 billion in MBIA shares and nominate two new members to the MBIA board. MBIA accepted the offer, but it still requires shareholder and regulatory approval. And given what appear to be serious problems at the insurance company, at least one high-profile investor doubts that the transaction will proceed. Bill Ackman, who runs activist hedge fund Pershing Square, recently sent a letter to federal and New York state regulators challenging the Warburg deal. Ackman, who's been betting for years that MBIA shares will fall, wrote Dec. 14 that MBIA's press releases regarding the Warburg plan "are misleading" because they treat it like a done deal. Far from complete, Ackman said, key conditions are likely to derail it. Ackman didn't elaborate because key terms of the agreement were not disclosed. But he went on to claim that MBIA misled investors about its capital and risk profile, and may already be in violation of agreements it made to Warburg. MBIA and Warburg Pincus did not return calls seeking comment. "Far from a vote of confidence in MBIA, the transaction appears to be a conditional contract It does not appear to be a bona fide commitment to invest come hell or high water," wrote Ackman. If Ackman's right, MBIA's problems could soon be Wall Street's too. 2 #pagefooter ul{margin:0;padding:2px;) #pagefooter ul li{margin:0;padding:0;list- style:none; float: left; padding-left:8px;I #diggLink{) #diggLink a{padding- bottom: 2px; padding-left: 20px;cursor: pointer;background: url (htip://i.cdn.turner.com/money/.element/img/2.0/fortune/buttons/digg.gif) no-repeat top left;) #fbLink{) #fbLink a(padding-left: 20px;cursor: pointer;background: Uri (http://i.cdn.turner.com/money/.element/img/2.0/fortune/buttons/facebook.gif) no-repeat left;) Find this article at: http,ilmoncy.cnn.coml2oo7112/2otnews/Campanies/booner_mbia.fortune/index.htm I-- Check the box to include the list of links referenced in the article. 2007 Cablo News Network LP, LLP. http://cnnmoncy.printthis.clickability.com/pt/ept?action=cpt&title=MBIA%27s+%248. t+b... 8/18/2008 1VBIA Insurance Corp. `AA' Rtgs Affirmed With Negative Outlook; Off CreditWatch Neg Rationale PrimaryCre d1 t Analysls David Veno On Aug. K 2008, Standard & Poor's Ratings Services affirmed its 'AA' financial strength New York rating on MBIA Insurance Corp. and removed it from CreditWatch Negative. The outlook is (1) 212-438-221Q$ (1) i12-438 dav-veno Liz) negative due to IvIBIA's significant exposure to domestic nonprime mortgages and related standardandpoors.com exposures to collateralized debt obligations (CDO) of asset-backed securities (ABS). Secondary CreditAnalysts Oick P Smith NOW York In addition, the negative outlook reflects our belief that the MBIA franchise has been damaged (1) 212-438-2095 dick smith@ and that the company will face diminished new business flow. Removal of the negative stan_ dardandpoors.com outlook will be dependent an clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments. The 'AA' financial strength rating on the company is supported, in our opinion, by currently sound claims paying ability and liquidity levels. MBIA's margin of safety, as measured by Standard & Poor's capital adequacy test, is in the 1.Ox-1.lx range, well above the level required for a 'AA' rating. In our view, MBIA's success in accessing $2.6 billion of additional claims-paying resources is a Ratings0irect strong statement of management's ability to address the concerns relating to the capital Publication Date adequacy of the company. MBIA did not, however, receive value in the capital adequacy August 14, 2008 model for the $1. L billion of capital retained at the holding company as this money may be used to fund its proposed new insurance subsidiary or support other initiatives. It is worth XIBIA Insurance Coip. AA'RtgsAtBnned WRtt] Negative Outlaok; OffCre&ffatcli Neg noting that, although this money sits at the holding company, management has stated that it will maintain a high capital level to support current policyholders. Nohvithstanding this commitment and funds at the holding company, in our view, the company's ability to access the capital markets at this time is limited as a result of market concerns about the company's exposure to a continued deterioration in key areas of the U.S. residential mortgage sector and related CDO of ABS structures. This limitation may place increasing pressure on capital adequacy if additional capital is needed. Standard & Poor's understands that management has initiated a plan that would restructure its business in such a way that, according to MBIA, the public finance business would be insured by a separate now dormant insurance subsidiary and stabilize MBIA's 'AA' rating. With regard to the current financial guarantee operations, management has indicated that over the next 12 to 18 months, new business underwritten will be negligible as management works toward this goal. Our view of the restructuring will depend in large part on whether we believe management can put together a sustainable business model and demonstrate the ability to generate a profitable stream of revenue that is of sufficient volume and quality to support the capital employed in the business. Outlook The negative outlook reflects Standard & Poor's concerns relating to MMA's exposure to domestic nonprime mortgages and related CDO of ABS exposures, as well as our belief that the MBIA franchise has been damaged and that the company will face diminished new business flow. A revision of the negative outlook will depend on, among other factors, clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments. Ratings List Ratings Affirmed; CreditWatchlQutlook Action To From MBIA Insurance Corp. MBIA Insurance Corp. of Illinois MBIA Assurance S.A. Capital Markets Assurance Corp. Issuer Credit Rating Local Currency AA/Negadve/ AAPvVatch Negl- MBIA Insurance Corp. MBIA U.K. Insurance Ltd. MBIA Insurance Corp. of Illinois MBIA Assurance S.A. Capital Markets Assurance Corp. Financial Strength Rating Local Currency AA/Negativel AAAVatch Negl- MBIA Insurance Corp. MBIA U.K. Insurance Ltd. .Standard & Poar's I ANALYSIS 2 11MM Insurance Corp. `AA' Rtgs Aflh7ned With Negative Outlook; Off CreditWatch Neg MBIA Assurance S.A. Financial Enhancement Rating Local Currency AA/-- AA/Watch Neg/ MBIA Inc. Issuer Credit Rating Local Currency A- Negative/ - A-/Watch Neg/- MBIA Insurance Corp. Senior Unsecured (I issue) A A/Watch Neg MBIA Global Funding LLC Senior Secured (4 issues) AA AAAVatch Neg Senior Unsecured (77 issues) AA AA/Watch Neg MBIA Inc. Senior Unsecured (7 issues) A- A-/Watch Neg North Castle Custodial Trust I Preferred Stock (1 issue) A- A-/Watch Neg North Castle Custodial Trust II Preferred Stock (1 issue) A- A-/Watch Neg North Castle Custodial Trust III Preferred Stock (1 issue) A- A-(Watch Neg North Castle Custodial Trust N Preferred Stock (1 issue) A- A-{Watch Neg North Castle Custodial Trust V Preferred Stock (1 issue) A- A-/Watch Neg North Castle Custodial Trust VI Preferred Stock (1 issue) A- A-!Watch Neg North Castle Custodial Trust VII Preferred Stock (1 issue) A- A-/Watch Neg North Castle Custodial Trust VIII Preferred Stock (I issue) A- A-(Watch Neg Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web- based credit analysis system, at www.ratingsdirect.com. 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