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More Misery for MBIA


Shares fall 27% after the bond insurer disclosed its exposure to risky CDOs, calling into question its overall profile

One day after its ratings outlook was cut to negative by Standard & Poor's, bond insurer MBIA (MBI) took another hit after it presented details of its exposure to the troubled credit markets.

MBIA said Dec. 20 that its total exposure to bonds backed by mortgages and collateralized debt obligations is about $30.61 billion. Included in that exposure is a pool of about $8.14 billion in CDOs backed by a combination of other CDOs and mortgages, which some analysts consider the riskiest part of an investment portfolio.

Indeed, CDOs backed by CDOs are known somewhat derisively in the market as "CDO-Squared". The size of MBIA's exposure to the risky asset class calls into question its overall risk profile, according to analysts.

MBIA shares fell 27% to $19.41 in afternoon trading Dec. 20. Earlier in the session, shares hit a 52-week low of $18.84. Shares of MBIA had traded between $24.62 and $76.02 during the past year.

Value Declining Rapidly

MBIA said its total exposure to bonds backed by mortgages and collateralized debt obligations is about $30.61 billion. Included in that exposure is a pool of about $8.14 billion in CDOs backed by a combination of other CDOs and mortgages, which some analysts consider the riskiest part of an investment portfolio.

CDOs are complex financial instruments that combine slices of assets and other debt. The value of the mortgage-backed bonds and CDOs has been declining rapidly in recent months as the underlying debt has increasingly defaulted. Many CDOs and mortgage bonds are backed by subprime mortgages, which are given to customers with poor credit history and which have been among the worst performing loans.

Morgan Stanley (MS) analyst Ken Zerbe said Dec. 20 the size of MBIA's exposure was surprising and riskier than he previously thought. Zerbe recommends avoiding investing in all bond insurers until they can accurately assess the final size and scope of their mortgage and CDO losses.

Standard & Poor's equity analyst Catherine Seifert cut her rating on MBIA shares to sell from hold on Dec. 20, "We share the market's dismay that this revelation changes the risk profile of MBI as compared with its financial guaranty peers," she wrote in a note on the S&P MarketScope Web site. Seifert cut her 12-month target price to $19 from $35. (S&P Equity Research operates separately from S&P Ratings. S&P, like BusinessWeek, is a unit of The McGraw-Hill Cos. (MHP).)

On Dec. 19, S&P Ratings affirmed its AAA rating on MBIA but placed the company on a negative outlook as part of a larger action in which it also downgraded or lowered the ratings outlook on six bond insurers. A negative outlook means the company has a one-in-three chance of being downgraded in the next two years.

The rating agency said the actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage-backed securities and CDOs of asset-backed securities. S&P said its "stress test" analysis showed the affected companies may experience "claims and/or capital-consumptive negative rating transitions such that their capital resources may no longer be sufficient at their respective rating levels."

In a Dec. 20 note, S&P Ratings said it fully incorporated MBIA's exposure to mortgage bonds and CDOs when it affirmed the bond insurer's rating Dec. 19.

By BW, Standard Poor's, and Associated Press staff

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