Tuesday, April 12, 2005

MBIA's Future Hangs On Credit Rating

The municiple/mortgage bond insurer MBIA is under scrutiny, and a NY Times article lets us in on some details. ""Investors would be reluctant to buy any new issues insured by MBIA at a lower credit rating," said David Veno, with S.& P..Mark McCray, at Pimco, agreed.'MBIA needs to protect that rating at all costs..If they lose that, they are toast.'"

Of course the ratings agencies have a close relationship with MBIA, maybe too close. "The agencies earn profits from rating the securities backed by MBIA. Reflecting their close relationship, in 1990 MBIA Inc. appointed Freda S. Johnson, formerly chairwoman of Moody's municipal bond ratings group, to its board. She resigned at the end of 2004, the same year that another former Moody's employee, Debra J. Perry, joined the board. Ms. Perry had just retired from Moody's, where, among other things, she oversaw the ratings of financial companies including MBIA."

Then there is this issue. "Analysts say they were briefed long ago by MBIA on the transactions under review by regulators, including its ties to Channel Reinsurance, a company that MBIA helped establish last year and in which it holds a 17.4 percent stake. 'We were fully aware of it,' said Stanislas Rouyer.Moody's was not aware, however, of any side arrangements with Channel to limit Channel's losses, an area regulators are investigating. 'If true, that is a disturbing development.'"

"Sean Egan said he was not surprised that Moody's and S.& P. had not taken similar actions. S.& P. and Moody's 'will want to be careful with a large important issuer like MBIA..They will wait until there is a really big blowup.'"


At 3:31 PM, Anonymous Anonymous said...

I don't think that it is just the MBIA's future that hangs on that credit rating. I've got a sneaking suspicion that the whole home mortgage industry is as much a house of cards as the bubble itself is. I say this because I just don't understand how 2% ish between the mortgage rate and the Fed rate is enough to provide profit to FNM, a mortgage consolidating company and the ultimate bond holder. I smell a rat here.

I wonder what happens to the derivatives that probably cover MBIAs losses when its bonds go from BBB to junk and the yield increases on them.

Hmmm.... I wonder if they happen to have people long mortgages financed extremely short, trying to make money on the long term/short term spread. If their rating goes to junk, they lose the spread advantage and the game is over.

Possibly for a lot more than just MBIA.

At 5:39 PM, Blogger Ben Jones said...

(Possibly for a lot more than just MBIA)

I agree, and I will try to follow the MBIA, AIG, GMAC mess. If you see any links, please post them.


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