MBIA Financials in Doubt

MBIA is revealing itself to be even more of a garbage barge than many cynics thought.

On February 25, in a statement which went largely unnoticed, new MBIA CEO Jay Brown had “questions” about the 2007 preliminary financial results announced by the previous regime, and hadn’t signed off on the financial statements. That’s a big red flag.

A Bloomberg story today tells us that while Ambac could muster up its loss estimates for January (it wrote down derivative contracts by $650 million), MBIA isn’t sure where it stands beyond knowing it has taken a hit:

….according to a regulatory filing on Feb. 29. Armonk, New York-based MBIA said it couldn’t estimate January’s losses…..An estimate for losses through Jan. 31 “is not available at this time,” MBIA said. The company said it “observed further widening of credit market spreads,” indicating the value has declined.

And Warburg Pincus trusted the forecasts they provided? The private equity firm is going to have its head handed to them.

It gets even better: the one decent business the bond guarantors had, muni bond insurance, is going the way of the dodo bird. If competition from Berkshire Hathaway, which has an AAA that everyone believes in wasn’t enough, the customers themselves are in revolt.

As the New York Times reported today, municipalities are increasingly pressuring the rating agencies, who grade states and cities on a much tougher scale than corporations. Not only do municipalities have a lower propensity to default, but when they do, in the vast majority of cases, they only miss a payment or two, while defaulting corporations often wind up in Chapter 11, giving investors losses on their principal as well as interest payments.

Now this campaign is in its early stages, but the fact set is ugly. The rating agencies had an economic incentive to be unduly harsh; municipalities who wanted better ratings would go to the monolines, and the ratings agencies would collect a second fee for issuing a new rating.

It isn’t yet clear how far or how fast the rating agencies will retreat on their muni rating practices, but they are in so much hot water now that they are likely to make major concessions the next year or two. And that puts the final nail in the coffin of the monolines’ remaining business.

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