Monday, March 2, 2009 4 comments ++[ CLICK TO COMMENT ]++

MBIA reports $1.2 billion 4Q08 loss ($642m actual impairment)

MBIA just announced its 2008 fourth quarter earnings:

The Company recorded a net loss of $2.7 billion, or $12.29 per share, for the full year 2008, compared with a net loss of $1.9 billion, or $15.17 per share, for the full year 2007.

The Company recorded a net loss of $1.2 billion, or $5.30 per share, for the fourth quarter of 2008 compared with a net loss of $2.3 billion, or $18.55 per share, for the same period of 2007.

...


The Company increased by $642 million in the fourth quarter its expectations for pre-tax credit impairments, a non-GAAP measure, on insured credit derivatives referencing selected multi-sector CDOs.



It's not clear to me if MBIA is under-reserving for losses or if the $642m is realistic. One of the threats to MBIA, one that doesn't plague Ambac, is its exposure to commercial real estate. Since commercial real estate only started correcting recently, it's difficult to say if things will get worse for MBIA or not.


During the fourth quarter, the Company repurchased 22.8 million shares of its common stock at an average price of $5.74. The Company repurchased a total of 30.5 million shares in 2008 at an average price of $7.25.

For the full year 2008, on a consolidated basis, the Company recorded $410 million in pre-tax net gains on the extinguishment of approximately $2.0 billion of debt. In addition, in the fourth quarter MBIA repurchased perpetual preferred stock of MBIA Insurance Corporation at a substantial discount.

...


MBIA's Book Value per share as of December 31, 2008 was $4.78 compared with $11.37 at September 30, 2008 and $29.16 at December 31, 2007... Adjusted Book Value (ABV) per share, a non-GAAP measure, declined to $40.06 at the end of the fourth quarter from $77.89 at December 31, 2007, and increased from $37.55 at September 30, 2008.


Well, you can't complain about capital allocation decisions of MBIA. It bought back some stock and preferred shares at low prices. Timing could always be better but at least something positive is happening.

Although the stock price is way below book value--either the GAAP book value or the adjusted book value--it's difficult to say if future losses will destroy the book value.

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4 Response to MBIA reports $1.2 billion 4Q08 loss ($642m actual impairment)

RIV
March 3, 2009 at 7:56 AM

"...it's difficult to say if future losses will destroy the book value."
s
Which book value?s Book at National or at MBIA Corp, (muni Co or structured Co)?s This is what makes the splitsgood for shareholders and muni policy holders.s There is now a limit on the losses that the structured side can inflict.
s
RIV
s

Sivaram
March 3, 2009 at 8:54 PM

I think both can be under threat but I was thinking more of the legacy MBIA operation, which is where most of the book value is. I haven't read up on the legal separation and the potential liability of the new muni bond insurer but I'm uncertain about that as well (although one of my posters, ContrarianDutch says that the muni bond operation is independent.)
s
Muni bond insurance is quite risky (for political reasons) as Warren Buffett remarked in his latest letter. If municipalities face financial distress, they may push the bond insurers to absorb some of the cost rather than cut back their spending on civil employees, construction projections, and so forth.

Sivaram
March 5, 2009 at 2:13 PM

I think what Buffett is saying may occur when the situation is really bad. The Eurotunnel default, as well as Katrina and various other defaults in the past, occurred in normal times. I think the question is what happens when the economy is so bad--where multiple municipalities default and need severe cuts to services or salaries--that they feel compelled to do it.
s
I actually think this is a very low probability event since it will overthrow some legal contracts and call all sorts of questions about what is legal and what is not. However, in an extreme scenario, laws may be altered to suit various interests. For instance, the US government banned private gold ownership during the Great Depression. Right now, we have rumours of push by some to void all CDS contracts, which will totally call into question contractual obligations.
s
I think Buffett's point is that the insurers may be undepricing this risk.

contrariandutch
March 5, 2009 at 4:26 PM

It should be noted that muni issuers, unlike corporates, are not liquidated in bankruptcy. They continue to exist and so do their debts. In addition they have a lot of assets, albeit illiquid ones, relative to debt. Last but not least they have a lot of cash income that can be seized. The key to the low cost of muni defaults is not that defaults are few, although they are, but the fact that recovery is extremely high. The bond insurers are imo in a bette postion to make recoveries then individual bondholders as they can take action on behalf of the entire issue instead of a couple thousand/million worth of bonds. They are also deep-pockted companies that can afford drawn-out legal battles.
s
Stopping creditors, or bond insurers, from exercising their rights is theoretically possible but would imply that the US has largely given up on private property and instead come to belief that the govenment can seize anything it damn well pleases. FDR's seizure of gold came in a desperate situation and IIR gold owners did get banknotes instead, so no seizure without compensation.
s
Note that seizing property in this way would almost certainly violate federal law, so the federal goverment would have to back it. I don' see that happening short of a true Armageddon collapse of the US economy.
s
I think Buffet is really overestimating the risk here.

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