MBIA’s conduct continues to be shameful, yet the company is not getting the pillorying it deserves, at least from the media. Its latest bit of misbehavior: the company has reversed itself on its decision to remit $900 million of the proceeds of highly dilutive fundraisings to its insurance subsidiaries.
Why might that be? Well, the big bond insurer looks just about certain to lose its last AAA (Standard and Poor’s and Fitch have already cut the rating on its insurance sub to AA; Moody’s has MBIA and Ambac on negative watch, and given the actions of the other two agencies, the odds that it will follow its peers is high).
If the companies lose their top ratings, the odds also increase that they will be put in runoff mode, which means they cease writing new business, cut their parent company operations to the bone, and do the best they can to pay out existing agreements.
So what has MBIA done? It’s reversed its decision of May and contrary to the spirit (if not the letter) of its capital raising, is retaining proceeds at the parent level. From Bloomberg:
MBIA Inc., downgraded from AAA by Standard & Poor’s last week, hasn’t given $900 million to its insurance unit as planned and said it is now re-evaluating its business strategy and capital deployment plans.
“Our landscape has changed,” MBIA Chief Financial Officer C. Edward Chaplin said today in a statement distributed by Business Wire.
We weren’t too happy when MBIA said earlier it wouldn’t wouldn’t downstream the cash (note the amount at issue then was $1.1 billion. On May 12, the company announced it would remit $900 million to the insurance subs, so the intent then was to retain $200 million at the parent level). This post came a few days before, when it was revealed that MBIA was retaining cash at the parent level):
MBIA has brazenly advanced its own interests at the expense of investors and policyholders. A partial list:
Issuing a disappointing earnings release in the middle of the night in the hopes that it would garner less attention that way
Asserting it needed no more capital while the Dinallo-led “save the monolines” effort was still underway. CEO Gary Dunton’s claim was so patently bogus that it stirred the normally circumspect S&P to issue a swift rebuke
Telling the one major rating agency that has the guts to give the bond insurer the less-than-AAA it deserves to take a hike (fortunately, Fitch is ignoring that directive)
Admittedly, some of these unsavory actions took place on ousted CEO Gary Dunton’s watch; we now have Jay Brown in charge. However, old habits die hard.
The latest stunner is that the money raised in MBIA’s last, hugely dilutive equity sale is being held at the parent company. For those who have not followed the monoline saga, that’s scandalous.
The whole purpose of the fundraising was for the parent to then downstream the proceeds to the insurance subsidiaries. That’s where the insurance is written, that’s where the capital shortfall is.
So why is MBIA hoarding cash at the parent level? Well, executives (along with other corporate charges) are paid out of the parent company’s books. The subsidiaries can dividend cash up only if the are profitable OR get permission from their regulator.
The big bond guarantors have been notably loss-making of late. Eric Dinallo says that both MBIA and Ambac may need to raise more capital. The monolines’ business model is toast. The structured finance business involves bona-fide risk transfer, and the bond guarantors’ capital bases (equity is less than 1% of assets) is far too thin to allow for that, particularly when an AAA rating is essential for conducting business; the nearly risk free ratings arbitrage in the muni finance business is going the way of the dodo bird (and with local government budgets under stress, even that old supposedly cosmetic credit enhancement may wind up leading to some unanticipated losses).
So how does the hoarding of cash fit into this picture? Well, Bill Ackman, the hedge fund manager who was leading the campaign against the monolines, argued that they should be put in runoff mode, with the investors at the parent level sacrificed to preserve the claims-paying ability of the subs. That’s a course of action the regulators would almost certainly arrive at on their own if they thought the bond insurers were in peril.
So what does the holding of so much cash at the parent level mean? Aside from being a shameless case of duplicity, it says one of two things, neither pretty. First, they expect losses for the foreseeable future, and expect the regulators to prohibit dividend payments too. But withholding the entire $1.1 billion is an admission of how bad they expect things to get. Or second, they expect the regulators to put MBIA into runoff mode, and are keeping their cash to support the parent level empire that would otherwise be starved out of existence. But if so, the representations made by management about the soundness of the company are false.
No matter how you slice it, the sequestering of funds is wildly inconsistent with management’s position that MBIA has a good future, or indeed any future at all.