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Insurer MBIA's woes unnerve bond world

It reveals it guaranteed $8 billion of risky mortgage securities.

December 21, 2007|From Times Wire Services

The country's largest bond insurer shocked financial markets Thursday with a disclosure about its exposure to risky mortgage-related securities, sending its shares plunging and calling into question the safety of tens of billions of dollars of corporate and local government debt held by investors.

MBIA Inc. said that of the $30 billion in complex mortgage securities it insured, about $8 billion was of the type viewed as most risky. The revelation prompted Fitch Ratings to warn that it might cut its rating on MBIA in the next six weeks if the company cannot find $1 billion in new capital.

The insurer's shares plummeted $7.07, or 26%, to $19.95 on the news. The stock is down 73% this year.

MBIA is the largest of the AAA-rated bond insurers. Because of its size, many analysts have warned of dire consequences for the bond market if MBIA is downgraded, which would in effect prevent it from issuing new policies. Such a downgrade would have a domino effect: It would cause an immediate downgrade of many of the bonds insured by the company.

"We are shocked that management withheld this information for as long as it did," Morgan Stanley analysts Ken Zerbe and Yoana Koleva wrote to clients.

"This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' " than Ambac Financial Group Inc., the second-largest bond insurer, the analysts said.

For the last decade, Wall Street firms have profited by bundling and selling pools of mortgages, auto loans, credit card bills and more to investors. The riskiness of these securities was thought to be offset by the promise from insurers such as MBIA that they would step in to make principal and interest payments if issuers defaulted.

Because default rates have been low, bond insurers' earnings and share prices had soared -- until the sub-prime mortgage crisis hit. The fear now is that if MBIA or competitors such as Ambac and Financial Guaranty Insurance Corp. are unable to pay what could be a surge in claims on debt issues gone bad, it could overwhelm the already-suffering credit markets.

Although MBIA is in an "extremely volatile situation," its exposure will not be as bad as it first appears, Citi Investment Research analyst Heather Hunt said.

Based on MBIA's closing stock price, the market estimates that the insurer will lose more than $7.5 billion after taxes from its mortgage-related exposure.

Another credit rating firm, Standard & Poor's, said it fully incorporated MBIA's exposure to mortgage-related securities when it affirmed the insurer's AAA rating Wednesday. But S&P did place the company on a negative outlook, which means it views the company as having a 1-in-3 chance of being downgraded in the next two years.

S&P's action on MBIA was one of several warnings and downgrades the rating firm issued Wednesday. It slashed its rating on insurer ACA Capital to CCC from A, a move that affected billions of dollars in municipal bonds nationwide.

The value of mortgage-backed securities has been declining rapidly in recent months as defaults on the underlying home loans have mounted.

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