Incomplete. Unreliable. Inaccurate. Misleading.
Those are just some of the adjectives MBIA hurled at the New York Times on Wednesday in an epic, 2076-word rebuttal (with footnotes) of a story written by Gretchen Morgensen and Vikas Bajaj, and titled “MBIA debt is setting up a quandry.”
The story suggested MBIA was butting heads with New York’s insurance supremo Eric Dinallo over that pesky $900m everyone keeps talking about.
More specifically, according to the NY Times, certain clauses in MBIA’s CDS contracts were giving the the company “an edge” over regulators concerning its decision to “renege on a promise to shore up a crucial unit with $900 million in capital.”
Got that? No? Some background:
- Earlier this month, MBIA decided not to recapitalize its bond insurance unit - MBIA Insurance, as distinct from the holding company, MBIA Inc - with the $900m it had raised in an equity offering.
- MBIA’s CEO Jay Brown justified the decision in an extended letter to shareholders, saying the insurance unit’s loss of its triple-A rating had “fundamentally changed how we now need to think about capital issues.” In other words, trying to shore up an insurer that was effectively unable to write any new business would have been a case of throwing good money after bad.
- This decision sparked a firestorm of criticism, as well as some support. Tom Brown at Seeking Alpha argued, for instance, that MBIA’s insurance subsidiary was extremely overcapitalized at its new, lower rating and that “the last thing the board should be thinking about, therefore, is sending the unit another $900 million. Especially since, with the company writing little new business, its risk exposure is declining.”
- The clauses referred to in the NY Times story are ‘acceleration’ clauses which, if triggered, would allow counterparties to the CDS contracts to demand immediate payment. The NY Times contends that if these clauses were activated - i.e. if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators -
MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.In the case of Bear Stearns, the Federal Reserve feared that credit default swaps might unleash a chain reaction of losses if the bank were allowed to collapse. Given the threat that similar swaps may pose to MBIA, Mr. Dinallo is unlikely to push for a regulatory takeover of the subsidiary even if Joseph W. Brown, MBIA’s chief executive, refuses to recapitalize the unit.
Tosh! cried MBIA, which also dismissed as “speculative” and “erroneous” the story’s lead paragraph on promises reneged upon:
[No] o such “promise” has ever been made. The $900 million referenced is part of the net proceeds from the $1.1 billion equity offering that closed in February, which was issued as part of MBIA’s overall capital strengthening plan…No promise was made to put the capital in MBIA Insurance Corporation
And separately on CDS:
The story reports, “MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health.” This is not true for MBIA’s credit default swaps. MBIA does not provide insurance for single-name corporate obligors, rather for structured securitizations.
As for the risks of acceleration on CDS giving the company “leverage” over Dinallo:
This analysis is misleading. Typically in MBIA’s policies insuring CDS contracts, there are no provisions that allow a counterparty to terminate the insured CDS contract and make a claim under the policy, absent MBIA’s bankruptcy or insolvency or an MBIA payment default on the policy insuring the CDS contract…As MBIA’s financial condition and statutory capital are very strong and its claim paying resources are in excess of $16 billion, even mention of such a bankruptcy or insolvency proceeding is highly theoretical and extremely remote.
And the threat of a regulatory takeover:
While it is inappropriate for us to speak on behalf of the NYSID, we believe that the fact of our highly creditworthy balance sheet and liquidity with over $16 billion in claims-paying resources make talk of a regulatory takeover misleading and irrelevant. S&P has downgraded MBIA to Double-A, which puts us in a rating category of significant financial strength. Other financial institutions with this rating include AIG, Met Life and Citicorp. What’s at issue is the rating difference between Triple-A and Double-A credit quality; not the difference between solvency and insolvency. As Superintendent Dinallo has stated repeatedly, solvency is not the issue we are dealing with. The issue is whether the company deserves the highest credit rating, or some level below that.
MBIA even calls out the reporters on the story:
All these facts…have been a part of the public record through various and widely noticed letters and statements from the company. We also provided lengthy background to the reporters on the story in recent days. We believe that ignoring key facts – in favor of speculation and error – is simply irresponsible and we would suggest that readers regard this story as incomplete and unreliable.
Ouch.
And on top of all that, the company also managed to take a swipe at the ratings agencies:
It’s worth noting that if any party has changed course it has been the rating agencies themselves. They indicated in December that a successful capital raise would maintain the Triple-A rating and are now indicating that no amount of successful capital raise would have maintained that level.
The whole thing makes for gripping reading - so much so that we almost missed a separate article, printed in much smaller type at the bottom of the page (which is dedicated, we now notice, to “Clarifications and Corrections of Media Misperceptions and Errors”). That article, which is astonishing in its snarkiness, takes aim at the Wall Street Journal.
So far, the FT seems not to have raised the hackles of MBIA’s crack communications team. Fingers crossed…
Related Links:
MBIA Refuses to Downstream Cash, Uses CDS Fears to Defy Regulators - Yves Smith on the NY Times story
MBIA’s monoline endgame ethics - FT Alphaville
MBIA vs NYT - Felix Salmon
