By Patrick M. Fitzgibbons NEW YORK (Reuters) - MBIA Inc (MBI.N) said on Thursday it
would have the cash to meet commitments even after reporting a
worse-than-expected loss, but rating agencies kept the pressure
on the world’s largest bond insurer with a series of actions
and warnings late in the day. U.S. bond insurers’ shares staged a comeback after MBIA
held a marathon conference call to reassure investors. U.S.
government bonds rose on a wave of safe-haven buying following
a rating agency cut of an MBIA rival. Speculation about looming cuts in credit ratings for bond
insurers has battered the U.S. stock market in recent sessions,
though shares were broadly higher on Thursday. Despite gloomy
employment data on Thursday, financial stocks rebounded. MBIA closed up 11 percent at $15.50, and Ambac Financial
Group Inc (ABK.N) jumped 9.2 percent to $11.72, both on the New
York Stock Exchange. MBIA’s stock has tumbled about 50 percent
this year, while Ambac has plummeted almost 70 percent. Late on Thursday, Moody’s Investors Service warned that the
amount of capital needed to support the mortgage-related risks
of bond insurers has grown significantly and some bond insurers
may not be able to support their “Aaa” ratings. Moody’s expects
to conclude a review of the industry by mid- to late-February. Rival rating agency S%26amp;P cut its ratings on smaller MBIA
competitor FGIC Corp’s bond insurance arm, and placed its top
ratings on MBIA on review for a possible downgrade. S%26amp;P also
said it may cut the “AAA” rating of XL Capital Assurance Inc,
the bond insurance arm of Security Capital Assurance (SCA.N). S%26amp;P cut Financial Guaranty Insurance Co’s “AAA” insurer
financial strength rating by two notches to “AA” and cut parent
FGIC’s long-term rating by three notches to “A” from “AA.” FGIC is owned by a group that includes mortgage insurer PMI
Group Inc (PMI.N) and private equity firms Blackstone Group LP
(BX.N), Cypress Group and CIVC Partners LP. Bond insurers have moved center stage in a credit crisis
that began last summer after defaults soared on U.S. subprime
mortgages, causing losses for banks, funds and insurers. The bond insurers have guaranteed municipal and consumer
debt worth about $2.4 trillion, of which about $900 million is
“structured finance” debt, including mortgage bonds held in
collateralized debt obligations (CDOs). Fears about the U.S. credit situation have spread across
the globe. Soured bets on investments tied to U.S. subprime
mortgages have cost Japan’s top three banks $4.7 billion so
far, and analysts predict more pain ahead.
THE LOSSES Just after midnight EST on Thursday, MBIA reported a loss
of $2.3 billion, or $18.61 a share, versus a profit of $181
million, or $1.32 a share, a year earlier. On an operating
basis, MBIA lost $3.30 a share, wider than the Wall Street
expectation of $2.97, according to Reuters Estimates. MBIA is writing down $3.5 billion in its credit derivatives
portfolio, including a $200 million credit impairment. It also
set aside $713.5 million, including $100 million for an
unallocated loss reserve for MBIA’s prime, second-lien mortgage
exposure. Despite the poor results, investors were cheered by MBIA’s
declaration it could raise new cash to meet its commitments. Tom Sowanick, chief investment strategist for Clearbrook
Financial LLC in New York, said there is “reassurance from MBIA
today that they have sufficient capital to cover its needs.” Investors and analysts still had many questions about the
company’s finances. Its quarterly conference call lasted about
four hours — versus last quarter’s 1 hour and 42 minutes.
THE QUIZ SHOW Many of the most contentious points were raised by William
Ackman of hedge fund Pershing Square Capital Management, who
claimed in a letter on Wednesday that Ambac and MBIA face
combined losses topping $23 billion from bonds they insured. He
said the companies should be forced to stop paying dividends. Pershing Square has shorted Ambac and MBIA shares, meaning
it will profit if the stock drops. Company officials specifically disputed his claims. MBIA called Ackman’s model “a black box,” containing
“extreme assumptions” that produced desired results. They added
that the model does not account for cash flow and required
payments on deals in which the insurer might participate. MBIA, which guarantees municipal bonds and repackaged
consumer debt, said it sold $1 billion in surplus notes to
boost its capital levels earlier this month. Chief Executive Gary Dunton said the measures would offset
the cash it needed to set aside during the quarter. “We believe that these steps, along with reduced capital
requirements resulting from slower business growth, will result
in our capital position surpassing rating agency Triple-A
requirements … and will allow us to continue serving the
needs of our clients and investors,” he said in a statement. The company also said it would raise more cash as needed.
SEES ‘AFFIRMATIVE’ OUTCOME Chief Financial Officer C. Edward Chaplin said on the call
that MBIA would continue to work with Moody’s to keep its
triple-A rating and believes the outcome of a Moody’s review
will be “affirmative.” S%26amp;P’s actions came a day after the rating agency said total
losses for financial institutions from continuing mortgage
market problems will eventually total more than $265 billion. Some wider market data on the municipal market could also
raise concerns about MBIA and the bond insurance industry. On Thursday, Thomson Financial said U.S. municipal bond
volume dropped 47 percent in January from a year earlier and
that only 32 percent of all securities sold this month were
insured compared with more than half guaranteed a year ago. But Chaplin said MBIA’s outlook is not that dire. “There is no scenario that we can identify that would
result in MBIA becoming insolvent, having a liquidity event or
being intervened with by the regulator, and experiencing a
default of any kind,” the CFO said. (Additional reporting by Dan Wilchins, Burton Frierson,
Anastasija Johnson, Neil Shah, Walden Siew, Karen Brettell,
Jonathan Stempel, Lilla Zuill and Ellis Mnyandu in New York;
Editing by Brian Moss/Jeffrey Benkoe/Braden Reddall)
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