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Monday, May 12, 2008

MBIA Reports Scary Earnings; NEGATIVE Revenues

MBIA Posts Loss of $2.4 Billion as CDO Slump Deepens (Update1): “MBIA Inc., the bond insurer that lost 87 percent of its market value in the past year, posted a net loss of $2.4 billion as the slump in mortgage securities deepened.

The first-quarter net loss was $13.03 a share, compared with a profit of $198.6 million, or $1.46 a share, a year earlier, Armonk, New York-based MBIA said in a regulatory filing today. Unrealized losses from derivatives were $3.58 billion.”

Let’s put these numbers into context. MBIA (MBI) closed at $9.43 on Friday, giving the company a market capitalization of $2.23 billion. The loss of $2.4 billion this quarter alone is greater than the value of the entire company…

Now get this… because this is rather cool: REVENUE for the quarter was NEGATIVE. Yeah. You read that correctly. Revenue was -$2.96 billion. How could this even be possible? Well, as net premiums written fell by nearly half and losses on insured derivatives soared to $3.58 billion, MBI had to record NEGATIVE revenues on a $668 billion portfolio.

Somebody tell me how do you make money when your revenues are negative? I think I skipped that class, or killed those particular brain cells out at the bar.

An executive summary and discussion of MBIA's results and balance sheet position follow:

-- Credit Impairment: During the first quarter, MBIA conducted a thorough analysis of its housing-related exposures in order to update its estimates for impairments and loss reserves. As a result of this review, the Company recognized a total of $1.34 billion of pre-tax impairments and loss reserves on its housing-related insured portfolio in the quarter, bringing the cumulative total of incurred pre-tax credit losses for housing-related exposures to $2.15 billion over the past two quarters. The impairments and loss reserves are expressed on a net present value basis and are expected to be paid out over the next four years for direct and multi-sector CDO squared exposures, and up to 30 to 40 years for the Company's insured multi-sector collateralized debt obligations ("CDOs"). The Company does not anticipate material additional impairment for these exposures in the foreseeable future, unless the U.S. housing and mortgage markets perform materially worse than MBIA is projecting.

My Comment: “MBIA had insured bonds backed by home equity lines of credit and closed-end second loans totaling $21 billion at the end of 2007, according to the company's Web site. Almost $9 billion of those securities were originated in 2007.”

Equity lines of credit and second loans are worth exactly ZERO on any home that goes into foreclosure. The guys holding the first mortgage end up taking about a 40% haircut now. That $21 billion in loans that they’ve insured are worth a lot less than they think they are, especially since $9 billion or 42.9% of that was written in 2007 just after home prices PEAKED. I also think it is safe to assume that the U.S. housing and mortgage markets will perform materially worse than MBIA is projecting.

-- Capital Position and Liquidity: MBIA successfully raised $2.6 billion in the quarter to support its Triple-A ratings, the most raised by any monoline insurer in the current troubled capital market. With the elimination of its shareholder dividend, the holding company, MBIA Inc., has enough cash on hand to cover a multiple of its required cash outflows in 2008, and the asset/liability management business has sufficient cash and assets to cover all of its maturing liabilities in 2008 and beyond. MBIA Insurance Corporation's liquid assets and operating cash flow are expected to be more than sufficient to cover both current and anticipated future claims payments.

My Comment: MBIA Inc, the parent company, is holding the last $1.1 billion raised. This means that the executives can keep paying themselves while MBIA the insurance unit goes bust.
MBIA Keeps $1.1 Billion, Raised to Save Insurer AAA (Update1): “MBIA was criticized by Fitch Ratings, which said on April 4 the decision raised the risk that the cash may not end up as capital for the insurance unit as MBIA had promised. While Fitch downgraded MBIA to AA from AAA, Moody's Investors Service and Standard & Poor's cited the capital raising as a reason for keeping the insurance unit at AAA.”

Maybe NOT? Ha! Guaranteed WON’T. This is how the big swinging dicks make sure they get paid. If you’ve got a pension, YOU’RE most probably the sucker taking the hit. If you see any MBIA executives or accountants in the street, think of the FinancialNinja and drop quick them real quick for me.

“Regulators are waiting for MBIA to contribute the funds, according to New York State Insurance Department Deputy Superintendent for Property and Capital Markets Michael Moriarty.

“It was never our expectation that the funds raised would go anywhere other than to the insurance subsidiary,” Moriarty said. MBIA spokesman Jim McCarthy declined to comment.”

That was the plan all along. Golden parachutes for the guys who messed it all up from their giant corner offices, and pink sheets for the innocents crammed into their cubicles who just followed orders and executed corporate policy.

-- Ratings Position: In late February, Standard & Poor's and Moody's affirmed MBIA's Triple-A ratings with negative outlooks. At year-end 2007, the Company exceeded Standard & Poor's target capital requirement by $400 million and met Moody's minimum requirements for a Triple-A rating but fellshort of Moody's target capital requirement by $1.7 billion. MBIA expects to meet this target over the next two quarters.

My Comment: Nobody cares about the Triple-A rating anymore. Standard & Poor's and Moody's have squandered all credibility. Even Warren Buffet couldn’t take it anymore.

Buffett Says Bond Insurers Don't Deserve AAA Rating (Update3): “Billionaire Warren Buffett, whose Berkshire Hathaway Inc. has begun competing with MBIA Inc. and Ambac Financial Group Inc. to insure municipal bonds, said some rivals don't deserve their AAA credit ratings.

Credit-rating firms shouldn't be giving top grades to bond insurers that borrow money at 14 percent or whose stock has dropped 95 percent, Buffett said at a press conference today in Omaha, Nebraska, a day after Berkshire's annual meeting.”

-- New Business Generation: The Company had very little new business production until its Triple-A ratings were affirmed with negative outlooks by S&P and Moody's in the last week of February. Since March 1, the Company wrapped 24 new public finance issues (primary market) totaling $9.1 million in Adjusted Direct Premium, or ADP, (a non-GAAP measure), and insured 222 bonds previously purchased by investors (secondary market) for a total of $17.9 million of ADP. The Company expects continued growth in opportunities to write profitable new business.

My Comment: Hahahaha. New business was $9.1 million plus $17.9 million. That will NOT feed the monster $668 billion portfolio that MBIA currently holds. New business wont’ be there to provide the cashflow to cover the losses on their existing portfolio. With solid, stable companies, such as Warren Buffett’s new insurer, why would anybody go to MBIA? MBIA would have to cut prices drastically to entice anybody. Translation: They would have to under price risk significantly to land new business… which is exactly what got them into this mess.

Its over. MBIA is dead.

-- Investment Management Services: MBIA's asset management business continued its new business activities in the quarter, growing its external fee-for-service advisory business by almost $1 billion in assets under management. It also continued to raise funds in the asset/liability management business at advantageous pricing levels, issuing approximately $700 million of investment agreements, signaling continuing strong demand for this product. Total average assets under management for the first quarter, including conduit assets, were $64.6 billion, down 1 percent from $65.4 billion for the first quarter of 2007.

My Comment: Total average assets under management continue to shrink, despite all the talk of growth.

-- Unrealized Losses: MBIA reported a pre-tax unrealized loss on insured credit derivatives (mark-to-market) of $3.6 billion in the first quarter, which includes $0.8 billion of credit impairments and which reflects the net present value basis of the amount of the mark-to-market that MBIA expects to pay as actual losses. While attention-getting, the mark-to-market loss is far less reflective of MBIA's business than credit impairments, and does not accurately indicate actual or expected losses. In addition, mark-to-market losses, except for the impairment, do not affect the insurance company's statutory capital or rating agency capital requirements. Unlike financial institutions with tradable, liquid portfolios of derivative assets and liabilities, MBIA's contingent insurance liabilities are not typically tradable, and are not subject to acceleration or collateralization. Fair value accounting, however, results in some inappropriate comparisons of MBIA's position to those of other financial institutions who must transact or collateralize at current market values or who could be subject to accelerated payments. This causes confusion about the true impact of mark-to-market losses on the value of the Company in the current environment. The Company does not expect the full amount of cumulative mark-to-market losses to be realized, except to the extent of the $1.0 billion in impairments estimated to date.

My Comment: What are they talking even talking about? They marked-to-market when things were good and when it pumped up their balance sheet. Now that they have to mark-to-market when things are bad ‘it doesn’t matter’ and ‘isn’t relevant’. Bullshit.

-- Disclosures: In order to further facilitate investors' understanding of its insured portfolio, the Company is substantially increasing its disclosures, including providing sensitivity analysis around key assumptions. With respect to estimates of loss due to the housing downturn, MBIA is providing certain stress estimates as well as the expected amount of losses as recorded in the financial statements.

My Comment: After a 90% drop in stock price management decides to become more TRANSPARENT. Brilliant.

-- Book Value: Financial institutions are typically valued by reference to their book values, as investors' confidence in the accounting for earnings ebbs and flows. However, in estimating MBIA's economic value, management believes that investors should adjust MBIA's GAAP book value to eliminate the impact of uneconomic factors like the unimpaired portion of the mark-to-market. MBIA's book value excluding the mark-to-market loss, but including all credit impairments, is approximately $24 per share. Adjustments, primarily representing deferred and contracted future premiums, net of a loss provision, add $18 to book value per share. With these adjustments, Analytical Adjusted Book Value(a non-GAAP measure) would be approximately $42 per share, and provides an economic basis for investors to reach their own conclusions about the fair value of the Company.

My Comment: Book value INCULDING mark-to-market losses is $8.70 for March 31st, 2008, down from $29.16 for December 31st, 2007. Mark-to-market is mark-to-market. When MBIA writes these values back up, THEN that will be reflected in book value. Analytical Adjusted Book Value is a non-GAAP measure for a reason. It is NOT a generally accepted accounting principle for the simple reason that it can be ADJUSTED as needed.

Monoline Related Posts:
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble


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