that being said, i think Jay Brown and his team should be commended for withholding the $ from opco. in my opinion, the run off value of the entities likely supports a higher price than the $12/share at which the capital was raised. the problem MBIA (and ABK, to some extent) faced is that the holding company liquidity was constrained by the problems at opco. without some forebearance from the regulators, the holdco’s faced significant liquidity issues over the next 5 years as long-term debt came due.

realty-based lawyer seems to fundamentally mis-understand the corporate structure of these entities. the underwriting company is a wholly-owned, bankruptcy remote subsidiary of MBIA corp. an equity holder of MBIA does not own a direct interest in the writing company; instead, s/he owns shares in a corporation that in turn owns the shares of MBIA Insurance. so when the prospectus language reads “the net proceeds shall support *our* business plan”, they are talking about holdco, not opco.

i am hard pressed to understand why injecting $900M of capital into an insurance company with unquantifiable liabilities and hostile regulators is a sound investment. the fact that they are willing to now play hardball with the regulators and rating agencies is a positive if you own the equity.

it’s a shame the banks don’t have the guts to call the government’s bluff the way MBIA is. the capital raises that the industry is undertaking are shameful. the *right* thing to do is shrink these balance sheets and constrict capital to the economy. that will dramatically improve margins and enable the industry to return to profitability much more quickly than it otherwise will.

ANON: “If I were an investor who invested I’d have to seriously think about suing management for fraud. “

Obviously you haven’t been following the situation closely. I’m speculating a bit but… What MBIA is doing is GOOD for the SHAREHOLDERS. I’m an Ambac investor and I wish Ambac still held onto its money. The people who say otherwise are not looking at it from a shareholder point of view.

Although it is possible in the off-chance that management is looting shareholders, I highly doubt that is the case here. I would rather let management do something with the money than the politicians/regulators. I can’t remember exactly but almost half the board of directors is from Warburg Pincus (majority owner) and I doubt this is some nefarious plot by management somehow bypassing the board.

By Yves portraying this as some management scheme, he totally misrepresents the situation. Keeping the money at the holding company is good for shareholders. It may or may not be good for other parties but it’s the shareholders that money (except for surplus notes, which are issued by the insurance subsidiary and are quasibond-equity instrument).

What makes you think that they are not acting in the shareholder interest? Stop painting a misleading picture as if this is some sort of wiked managment scheme to loot shareholders or the public.

The capital was raised to sustain a AAA rating–nothing more. If I’m not mistaken, that’s one of the key reasons cited for the capital raise (among others). It was not done to pay capital shortfalls for any claims or anything else. MBIA is way over the regulatory capital requirement and any rating agency requirement too (that’s why they are rated AA and not CCC for instance).

You seem to mistakenly think that this money belongs to the government (i.e. politicians and regulators), policyholders, or various other counterparties. Nothing is further from the truth. It was raised by the company and belongs to the shareholders until it is given to the insurance subsidiary (at which point the regulator has control.)

In addition, several key shareholders (such as Warburg Pincus and Third Avenue) owns a huge chunk of the company. So don’t you think management is influenced by them to act in the shareholder interests? Or are you saying that management is doing this contraray to all those shareholders? A huge chunk of Jay Brown’s net worth is supposedly tied up in MBIA, and he keeps buying shares in the open-market as well, so I fail to see much conflict.

Claiming that capital that was raised (i.e. money paid by shareholders) is being held by the holding company is “scandalous” either shows that you really don’t know what you are talking about, or you misspoke and could care less about investors.

Having said all that, I think the surplus notes, which are backed by the insurance subsidiary, may possibly have to be given to the insurance subsidiary. But even then, it’s difficult to see how the regulator or anyone else can block these moves when MBIA is (i) cannot be shown to be insolvent (either by rating agency standards or insurance regulatory standards),(ii) hasn’t defaulted/missed payments on any claims, and (iii) cannot be shown to lack enough capital to pay future payments for already booked credit impairments.

Finally, I hope I’m not misrepresenting your stance, but you seem like someone who is pro-intervention and seeking further government involvement in financial affairs, and as someone who is setting himself up to rise and fall with the sword of the government, how come you never blame the regulators for any of the problems? If MBIA, or Ambac, or FGIC, or whoever else, actually doesn’t end up having enough capital, shouldn’t some blame lie with the regulators? Or are the government agencies and politicians too close of an ally for you? Pinpointing the mistakes made by the regulators is not going to solve the problem but it will avoid anything in the future.

It’s clear you are not a fan of the monolines and that’s perfectly fine (some people, William Ackman and David Einhorn foremost, think this industry is nothing more than a scam to rip off municipalities). But claiming that this is some sort of evil scheme by management, or that this money somehow does not belong to the shareholders (i.e. hodling company) is ridiculous. I’ll give you the argument if you limited it to the money that was raised through the surplus notes but the share issuance belongs to the holding company until it decides what to do.

(I apologize for attacking you Yves. I generally respect your views. Your blog is very good and I like your thinking (you do bring a differing take on many things). But it just seems that the problem is that many don’t have any skin in the game. It’s easy for you gals & gals to bash Ambac or MBIA or Lehman or Bear Stearns or whoever-else-seems-unpopular without anything substantive. Some of you are short-sellers so it’s understandable what you do to make money. But the rest clearly have no idea what they are saying, doing, or representin’ )

Per reality-based lawyer, it will be amusing to see the fur fly….and Ackman’s position is the same as yours. HIs point was the holding company ought to be toast. The monolines will clearly fight any claim under the insurance policies they reasonably can, so the fate of the insurance subs hinges at least in part on the success (and cost) of their litigation strategy.

Section 17 of the Securities Act makes it “unlawful” (i.e., criminal) to obtain money in the sale of securities “by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” Section 12 subjects any person who sells a security “by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading” to a claim for rescission. Then of course there’s Rule 10b-g (to the same effect as Section 17). All very basic securities laws: omission is as bad as commission.

If MBIA persists, I foresee (a) suits by shareholders who bought in the offering (especially beneficiaries of MBIA policies, including their swap counterparties), (b) derivative suits by MBIA shareholders against the Board for authorizing retention of the proceeds by the holding company, (c) suits by beneficiaries of MBIA policies as such (including swap counterparties), (d) potential regulatory action against MBIA the bond insurer and (e) potential regulatory action or possibly even criminal charges against MBIA the holding company by the SEC. Of interest: the directors and signing officers (probably Jay Brown and the CFO) are personally liable for securities law violations if they signed (or didn’t object to) the registration statement, and the SEC doesn’t necessarily think the company can indemnify them for that liability.

From a legal perspective, fascinating. From MBIA’s perspective, if it were me I’d probably reconsider.

As for Jay Brown versus Gary Dunton: it was Jay Brown who was in charge when MBIA set up Channel Re and invented a “creative” treatment of their AHERF losses – and when Ackman started his crusade. In other words, I think Dunton’s management was mostly consistent with the pattern set by Brown, so it’s fitting in a way that Brown is there again now, when the chickens are coming home to roost.

I’ll add, though, that I’m not yet convinced that the insurance company is insolvent. I think it will be able to pay claims on a timely basis. The holding company is a different matter.

GM should have done that a couple years ago when it had billions more in cash.

I’m not really sure why stocks go up when it is so incredibly difficult to get the money out of the corporations. I can see why taking companies private is so profitable.