Try being the largest U.S. insurer of bonds and asset-backed securities after publicly acknowledging that it has $8.1 billion in exposure to the riskiest of collateralized debt obligations backed by subprime home loans.
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- Andrew Leckey
Jan. 13: Bond backer may see its troubles grow exponentially
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- MBIA Incorporated
- Credit and Debt
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Stock of MBIA Inc. declined sharply in 2007. Although the giant bond guarantor has international growth prospects, don't count on them if it drops the ball in its own country.
Moody's, Standard & Poor's and Fitch rating services have affirmed their AAA financial strength rating of MBIA, but also added an ominous "negative outlook." They'd previously assumed MBIA had been conservative in all business dealings.
Now MBIA is scurrying to raise another $1 billion in capital to avoid a one-notch downgrade to AA+ that would force it to reprice all of the bonds it insures. It had already obtained $1 billion from private-equity firm Warburg Pincus. Such hat-in-hand frenzy is unusual for a judicious firm.
What's tripped up MBIA lately is the surprising extent of its exposure to a complicated financial product that even experts consider an unpredictable beast. This instrument takes the collateralized debt obligations--known as a CDOs, which are collateralized by obligations such as subprime home loans--one wobbly step further.
The "CDO squared" is basically a CDO constructed of other CDOs. If you find that concept difficult to get your head around, don't feel bad. Those issuing billions of dollars in them and those insuring those billions didn't fully understand them either.
Turns out that CDO-squared products represent nearly one-fourth of MBIA's total CDO portfolio--the worst of a bad lot.
The long-term nature of the bonds MBIA insures means consistent revenues, new business as old bonds are refinanced and many new bond issuers who will be seeking insurance. But expect trouble if it loses its credibility or must cope with a severe recession.
The respected Davis Selected Advisers LP, aware that MBIA won't disappear and has a business that has stood the test of time, recently increased its stake in MBIA to 5.1 percent, providing some lift to embattled MBIA stock.
It is best for the country if MBIA and other debt guarantors maneuver through this OK. But you have to wonder when mortgage market surprises from overly aggressive management will ever end.
Andrew Leckey is a Tribune Media Services columnist.