Very Sloppy Journalism From New York Times With Their MBIA Story
There is a story in The New York Times speculating on why the insurance regulator can't seize control of MBIA's insurance subsidiary. The New York Times is liberal and pro-government (I'm a liberal too but generally anti-government) so many of their articles generally criticize businesses if government is seen to be under attack. One can quibble over many points in the story. Felix Salmon of Portfolio.com raises some questions over the sloppy writing.
I don't have a problem with most of the article except for one point which the article rests on and assumes to be the case. The article is about the inability of the regulator to take control of the insurance company. That's fine but it never explains how the regulator can legally seize control. In fact, the regulator likely can't for the forseeable future. There are many other monolines in far worse shape (some downgraded below A), such as CIFG, FGIC, etc, and the regulator hasn't taken over.
The NYT article is relying on some wild rumours that the regulator can seize the insurance company due to MBIA holding onto capital that was raised. The authors make it seem as if the downstreaming of capital is the big key issue when in fact it is at the bottom of the list. The key issue is whether the insurance company is insolvent or not. Since the company cannot be shown to be insolvent, the authors' assumption that the regulator can seize control of the insurance company is misfounded and hence the whole article is nothing more than speculation based on rumours. I don't read the New York Times for rumours and I don't think too many others do either.
Shorts Clutching at Straws: Whitney Tilson Example
While we are on the topic of bond insurers, take a look at Tom Brown's critique of Whitney Tilson's misunderstanding of corporations. Also check out Whitney Tilson's response. Whitney Tilson's views, which are similar to the general public, seems to contain a lack of understanding of executives and the board of directors. The executives and board of directors of the holding company are responsible to the shareholders foremost. It seems that many are mixing up the holding company (shareholders come first) with the insurance subsidary (policyholders come first). The public, which doesn't really follow the bond insurers can be forgiven for not understanding the structure, but Whitney Tilson obviously knows the difference (so does William Ackman and other short-sellers.) After all, that's why most of them are primarily short the holding companies and not the insurance companies. I'm surprised to see that Tilson seems to think that the holding company executives are not supposed to act in the interest of shareholders.
Or is this just an example of the shorts twisting anything to make a case? Here is another silly point by Tilson:
First of all, no one can show that MBIA is insolvent or undercapitalized. It is undercapitalized for an AAA rating (according to the rating agencies) but that's about it. But insurance company ratings are only useful for writing new business. Beyond that it means nothing; insurers don't gurantee they will maintain their rating (they only guarantee payments of interest and principal upon default). In terms of regulatory requirements, all these monolines, including some of the lower-rated ones, are above the capital requirements (this is why the regulator hasn't taken control of them.) If Whitney Tilson knows the bond insurers as much has he claims, he clearly knows all this.
And as for asking the holding company to give back past dividends, is he serious? I mean, why not go back 10 years to the first CDS-type contracts and ask for everything back? Maybe we could force past shareholders to pay back whatever capital gains or dividend income their received. Are we also going to ask the rating agencies to pay back their fees? Furthermore, it is the regulator that gives the go-ahead to pay the dividend to the holding company. If MBIA made a mistake, so did the regulator. But it's hard to blame the government agencies for their mistakes, lest you lose credibility and influence (no different than Yves Smith of NakedCapitalism.com has avoided attacking the insurance regulators or government officials yet keeps blaming the monolines.) Again, Whitney Tilson knows he is making a ridiculous request. But clueless public, including journalists not familiar with the situation, will be convinced I'm sure.
The monoline insurers may go bankrupt (who knows?) but making these arguments when they cannot be shown to be insolvent is nothing more than a short-selling tactic. Too bad everyone is falling for it.
I don't have a problem with most of the article except for one point which the article rests on and assumes to be the case. The article is about the inability of the regulator to take control of the insurance company. That's fine but it never explains how the regulator can legally seize control. In fact, the regulator likely can't for the forseeable future. There are many other monolines in far worse shape (some downgraded below A), such as CIFG, FGIC, etc, and the regulator hasn't taken over.
The NYT article is relying on some wild rumours that the regulator can seize the insurance company due to MBIA holding onto capital that was raised. The authors make it seem as if the downstreaming of capital is the big key issue when in fact it is at the bottom of the list. The key issue is whether the insurance company is insolvent or not. Since the company cannot be shown to be insolvent, the authors' assumption that the regulator can seize control of the insurance company is misfounded and hence the whole article is nothing more than speculation based on rumours. I don't read the New York Times for rumours and I don't think too many others do either.
Shorts Clutching at Straws: Whitney Tilson Example
While we are on the topic of bond insurers, take a look at Tom Brown's critique of Whitney Tilson's misunderstanding of corporations. Also check out Whitney Tilson's response. Whitney Tilson's views, which are similar to the general public, seems to contain a lack of understanding of executives and the board of directors. The executives and board of directors of the holding company are responsible to the shareholders foremost. It seems that many are mixing up the holding company (shareholders come first) with the insurance subsidary (policyholders come first). The public, which doesn't really follow the bond insurers can be forgiven for not understanding the structure, but Whitney Tilson obviously knows the difference (so does William Ackman and other short-sellers.) After all, that's why most of them are primarily short the holding companies and not the insurance companies. I'm surprised to see that Tilson seems to think that the holding company executives are not supposed to act in the interest of shareholders.
Or is this just an example of the shorts twisting anything to make a case? Here is another silly point by Tilson:
Finally, Dinallo could also go after MBIA for $1 billion of capital that was upstreamed to the holding company. In December 2006 and again in April 2007 (when the mortgage crises was well underway), MBIA affirmed that its insurance subsidiary was overcapitalized and, based on this, the NY State Insurance Department approved a dividend of $500 million on each occasion to be paid from MBIA’s insurance sub to the holding company. Now that we know the insurance sub was not, in fact, overcapitalized, why can’t Dinallo ask MBIA to give that $1 billion back?
First of all, no one can show that MBIA is insolvent or undercapitalized. It is undercapitalized for an AAA rating (according to the rating agencies) but that's about it. But insurance company ratings are only useful for writing new business. Beyond that it means nothing; insurers don't gurantee they will maintain their rating (they only guarantee payments of interest and principal upon default). In terms of regulatory requirements, all these monolines, including some of the lower-rated ones, are above the capital requirements (this is why the regulator hasn't taken control of them.) If Whitney Tilson knows the bond insurers as much has he claims, he clearly knows all this.
And as for asking the holding company to give back past dividends, is he serious? I mean, why not go back 10 years to the first CDS-type contracts and ask for everything back? Maybe we could force past shareholders to pay back whatever capital gains or dividend income their received. Are we also going to ask the rating agencies to pay back their fees? Furthermore, it is the regulator that gives the go-ahead to pay the dividend to the holding company. If MBIA made a mistake, so did the regulator. But it's hard to blame the government agencies for their mistakes, lest you lose credibility and influence (no different than Yves Smith of NakedCapitalism.com has avoided attacking the insurance regulators or government officials yet keeps blaming the monolines.) Again, Whitney Tilson knows he is making a ridiculous request. But clueless public, including journalists not familiar with the situation, will be convinced I'm sure.
The monoline insurers may go bankrupt (who knows?) but making these arguments when they cannot be shown to be insolvent is nothing more than a short-selling tactic. Too bad everyone is falling for it.
Sivaram,
ReplyDeleteGood article, but I have one nitpick. The rating agencies were rather carefull when they downgraded to avoid implying that MBIA's insurance sub has insufficient capital for a AAA (they in fact implied it has quite enough). The downgrades were instead motivated with nebulous considerations about "franchise value" and such. MBIA is still AAA in terms of capital, it just isn;t perceives as AAA and that is enough for a downgrade these days.
I'm still not clear on whether they actually changed their loss estimates as well. Their primary reason was all the intangible reasons but it's a mystery. For instance, I don't think they really released a formal report, and Moody's still hasnt' done anything from what I can gather...
ReplyDeleteanyway... here are some bearish stories you may or may not have seen:
(i) Paulson (famous for shorting real estate) expects $1+ trillion in losses. This is the highest estimate I have seen and I don't know if it is excessive bearishness or if he actually has a better understanding. He also says that Ambac is the most troubled and leveraged entity out there.
(ii) Bloomberg story recapping the current situation and claiming that William Ackman is right (supposedly he is making a speech today). Nothing new here in my eyes. As for the CDS swap required upon insolvency of the insurance subsidiary, it actually gives leverage to the insurers. Furthermore, if the insurance comapny is insolvent, sharesholders like us will get nothing so it doesn't imapct us directly (however it can hurt the insurer buyers.)
(iii) story on the risk for ratings being cut below AA. Supposedly some muni bond funds have a put option to give the bond back to the banks. The banks will end up with all those bonds on their balance sheet.
Rating agencies haven't changed their capital adequacy requirements according to Ambac and MBIA commentary.
ReplyDeletePaulson is talking out of the wrong end of his body if you ask me (I am strongly inclined to use much less circumlocutory yet more colourful descriptions but I am not sure what level of decorum you would like to see in comments so staying on the safish side).
US residential real estate is valued in total at $20 trillion. About 50% of that is financed so total mortgages outstanding is $10 trillion. For losses to reach $1.3 trillion, assuming 50% recovery (well below the historical norm, but reflective of recent price declines and high LTV) that implies a 26% default rate for all mortgages. That is, all mortgages including prime, including those that have largely amortized alresdy, just everything. That is substantially worse even then the Great Depression if I am not mistaken. Nothing in the available data suggests such a total disaster is coming. It also contradicts Paulson's statement that distressed mortgage related securities will soon present a buying opportunity. As for the quote on Ambac, numbers please!
Interestingly, Ackman is busy firing of more thunderous sermons of doom and the stock price just shrugs it of.
Lat but not least, I am reading rumours (forgot where exactly) that Eric Dinallo would be willing to approve a new muni insurance subsidiary for MBIA and would actually like that new subsidiary to reinsure the existing muni bonds. Now there is a plan I really love. MBIA would achieve it's split in one fell blow and have a healthy subsidiary that could start paying dividends again to the holding company. Now if Ambac can get something like that done, we would be in the clear even if the original insurance subsidiaries do sink under the weight of CDO/RMBS losses.
ContrarianDutch: "Rating agencies haven't changed their capital adequacy requirements according to Ambac and MBIA commentary. "
ReplyDeleteWe really have a strange scnario in front of our eyes. If the rating agences do indeed keep the same loss estimates, it'll be interesting how they evaluate new entrants.
The loss estimates is something that I can't get my head around. I remember thinking hard about it before I invested in Ambac (I invested in January AFTER all the doom & gloom and reading William Ackman's reports--unfortunately before the big plunge in the stock price.) I think Ackman has been wrong on most fronts, except his HELOC/CES estimates. I was wrong with my expectation and Ambac/MBIA/rating agencies/et al were off too.
I really don't know how we can have wildly diverging estimates. The rating agency requirements are something like 3x their estimated loss. It's interesting that the rating agencies, who are supposed to be experts on credit instruments, still have their loss estimates at a fairly low number (I think it was somewhere around $4 billion to $5 billion). Although Ambac got downgraded, if the rating agencies do NOT change their estimate in the near term, it's actually very good news. They have deep visibility into the mortgage world (since they evaluate all sorts of mortgage bonds, not to mention ABS of other types) so it would mean that they are not seeing anything on the horizon.
As for Paulson, he deserves kudos for betting correctly on the real estate/credit collapse but sometimes people hold on too long. Just like how some bears who were right about the dot-com bust stayed bearish for the last 5 years (hence missing a bull market in most assets), it remains to be seen if the shorts are overstaying their welcome.
As for Eric Dinallo, until I'm proven otherwise, he is the good sheriff in town (Elliot Spitzer, when he was around, was the bad sheriff IMO.) I'm sure he realizes that the bond insurers are on his side. If the insurers go bust, the problem is going to be his (the bond insurer shareholders lose everything but most have already lost a lot (on paper)). The only thing is that he will favour policyholders in some rare cases where it won't help the monolines. The story you allude to, with him seemingly OK with the idea of starting a new subsidiary that re-insurers the muni bonds, shows that he understands the situation. I think he will work towards such a solution but the question is the amount of capital that will be needed.
I think we can judge the regulator's stance by looking at what he does with FGIC, CIFG, SCA, etc. Those monolines are in far worse shape and so far I don't get the impression that the regulator has done anything to hurt them.