The New York Observer’s profile of Bill Ackman, the founder of After Ackman shorted the stock and published “Is MBIA Triple A?” both the. Before the crisis, MBIA wrote credit derivatives on “Triple-A” tranches backed by mortgage loans and dodgy mezzanine CDOs. Bill Ackman. And it’s not just the fact of MBIA’s triple-A rating that drives Mr. Ackman batty; it’s its transcendent importance to the company’s business. As Gary.
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Marty Whitman can call him what he wants, but the guy knows his stuff. Fitch Ratings 99 Church St.
Bond Insurer Ratings Ladies and Gentlemen: To state the obvious, because of your critical role in the capital markets, it is essential that the ratings you publish are the result of comprehensive and accurate analysis.
As you well know, we have privately, in meetings and correspondence with you, and publicly in various presentations that we have made, called into question your ratings of the bond insurance industry, in particular, the ratings for MBIA Insurance Corp. Each of you, according to your recent public statements, is in various stages of updating your ratings of the bond insurers. Unfortunately, however, your previous ratings assessments have erred materially in their omission of certain critical analysis and the inclusion of outright errors in your work.
Insurance claims must be paid in cash. A bond insurer is only able to obtain tax benefits if the insurer is a going concern and is able to generate sufficient taxable income in the current or future years to offset the losses from paid insurance claims.
Your analysis makes the aggressive assumption that the bond insurers will remain going concerns and will therefore be able to continue to write new premiums and generate income in the future.
Ackman’s Letter to Moody’s: A Must Read –
In a runoff scenario, we do not believe that the bond insurers will generate sufficient taxable income to offset the net operating losses generated by paid losses. Even in the event the bond insurers generate taxable income in future years, it may be many years before these tax benefits can be realized, if ever, particularly in the event of corporate ownership changes caused by capital raising or stockholder turnover. Net operating loss carryforwards are not cash and are not available to pay claims and should therefore not be deducted from losses in calculating bond insurer capital adequacy.
Your updated rating assessments should be adjusted to exclude tax benefits in your calculation of capital adequacy 2 Covenant Violations and Loss of Access to Liquidity Facilities As a result of recent losses, both MBIA and Ambac have triggered covenant violations on their liquidity facilities. The impact of the loss of these facilities is material to the liquidity profile of the holding companies and their insurance subsidiaries and must be considered in your credit assessment.
That is, you reduce their credit exposure by those exposures that have been reinsured.
tripld This is best understood by example. Captive reinsurers whose ratings are not regularly updated offer the potential for abuse. While the rating agencies have not updated their credit ratings of Ram Re, the market appears to have already done so. The publicly traded stock of Ram Holdings Ltd.
The bond insurers include these guarantees in calculating the weighted average ratings of their investment portfolios. You should also carefully calculate the impact of a downgrade of the bonds held by one bond insurer that are guaranteed by other insurers in your calculation of capital adequacy. This limited review of exposures trriple the fact that the same lending practices and flawed incentive schemes that fueled the subprime lending bubble have been very much at work in CMBS and corporate finance.
Failing to consider the potential for losses in this portfolio in your calculation of capital adequacy is simply negligent. Substantially all of these premiums are from structured finance guarantees.
We believe that the bond insurers and the rating agencies do not adequately consider the facts that: There is also no mechanism whereby the bond insurers can borrow against these potential future premiums to be used to pay claims in the present day.
There is no other financial institution in the world which takes the present value of interest spread income acmkan loans in its portfolio and adds it to its capital.
MBIA: Triple-A Not What it Used to Be? – Herb Greenberg – MarketWatch
For all of the above reasons, we believe that the present value of future premiums should not be included in CPR. As you well know, depression lines of credit can only be drawn to pay claims on municipal obligations and only after a substantial deductible. In that the losses are occurring primarily on structured finance obligations, these lines of credit should not be included in CPR The Capital Base included in CPR is also likely to be overstated because the investment assets of the bond insurers consist primarily of bond insurer guaranteed obligations that are mia inclusive of the guarantee, when they should be valued on an unwrapped basis.
You should adjust your estimate of CPR for each insurer to reflect the above factors in order to accurately establish the capital available to pay mbiz. The MBIA surplus note issuance is perhaps the clearest example of the failure of the rating agencies to accurately assess the creditworthiness of a bond insurer.
This is prima facie evidence that your ratings of MBIA are overstated.
Most bond insurer holding companies have limited cash, have lost or will lose access to liquidity facilities, and have substantial acjman needs for interest payments, operating expenses, and dividends for so long as they continue to be paid. In addition, bond insurers with substantial investment management or swap operations have additional liquidity needs in the event of a downgrade.
We believe that both MBIA and Ambac have substantial collateral posting obligations in the event of a holding company downgrade. The combination of volatility in each of these markets and the increased collateral demands required in holding company downgrade scenarios will put ackkan severe strain on holding company liquidity.
MBIA: Triple-A Not What it Used to Be?
Various MTM programs also create liquidity risk as assets may have to be sold to meet redeeming bondholders. The liquidity risks of these programs and the underlying assets should be carefully examined. Because the holding companies typically provide indemnities for employees and directors, we would expect that directors would be loathe to allow liquidity to leave the holding company estate, depriving directors and employees of ackmman resources to protect themselves from claims.
In these circumstances, we would expect companies to seek bankruptcy us a means to protect the allocation of value among various stakeholders. While Warburg has made affirmative statements about the transaction, both publicly as ackmaj as privately, to surplus note buyers and the media, we believe there continues to be transaction closure risk for both the initial stock purchase and future rights offering, with the rights offering having greater uncertainty.
Ackman’s Letter to Moody’s: A Must Read
You should receive assurances from MBIA and require it to contribute the full billion dollars to its insurance subsidiaries before you include the funds in calculating insurance company capital. We believe a shareholder vote and approved registration statement will likely be required in such a circumstance, delaying the ability to consummate the transaction beyond the March 31st Trlple backstop drop dead date.
As uncertainty has grown, municipalities have raised capital without insurance and found that they can borrow at attractive rates as compared to historical id bond issuances. While some commentators have suggested that this might create a pricing umbrella that will benefit the existing bond insurers, this is demonstrably false. Because Berkshire Hathaway already possesses a real Triple A rating, the bonds that are wrapped with its guarantee will trade with a tighter spread when compared to a bond insured by a traditional bond insurer, even one without legacy structured finance exposure.
Lastly I encourage you to ask yourself the following question while looking at your image in the mirror: Can this possibly make sense? Please call me if you have any questions about the above. As usual, I will make myself available at your convenience.
Todd Sullivan’s – ValuePlays.