Berkowitz Bets on MBIA Survival as Financials Revive
MBIA Inc., the largest bond insurer, will be a profitable investment for Fairholme Capital Management LLC even if it can’t underwrite new business, said Bruce Berkowitz, the founder of the $17 billion investment firm.
“Do they have the wherewithal even if they don’t write another piece of business? Yes,” said Berkowitz, 52, who disclosed an 11 percent stake in MBIA this month, making him the second-largest shareholder of the Armonk, New York-based firm.
Investors are overestimating potential losses and undervaluing MBIA even as the company is unable to write new contracts insuring debt from cities and states more than two years after being stripped of its top financial guarantee ranking, Berkowitz said. Fairholme’s MBIA stake is part of a broader wager on financial firms including American International Group Inc. and Citigroup Inc. that were pummeled during the credit crisis.
“You have institutions, where there is tremendous fear, disgust, hate. Where taxpayers, in some instances, have paid to bail them out,” Berkowitz, who’s based in Miami, said in a telephone interview. “The pricing reflects the pessimistic attitude.”
Berkowitz, named in January as U.S. stock manager of the decade by Morningstar Inc., is the second-largest shareholder behind the U.S. government in AIG and ninth-biggest in New York- based Citigroup, according to data compiled by Bloomberg.
MBIA shares have more than doubled since the beginning of the year as the company has continued to report a surplus capital position. The firm also said it expects to be compensated for losses on improperly underwritten mortgages that Wall Street bundled into bonds it insured. MBIA rose 10 cents, or 1.16 percent, to $8.73 as of 4:01 p.m. in New York Stock Exchange composite trading.
The shares tumbled from a high of $73.31 reached in late 2006 as losses on home-loan securities mounted and Moody’s Investors Service and Standard & Poor’s stripped the insurer of its top credit grade in June 2008.
The structured finance unit, MBIA Insurance Corp., is now ranked B3, six steps below investment grade, by Moody’s.
The shares are undervalued based on the company’s so-called adjusted book value, Berkowitz said.
The figure, reported by the bond insurer at $36.01 a share at the end of the first quarter, provides an indication of the value of the company in the absence of any new business activity, according to MBIA. The measure doesn’t comply with generally accepted accounting principles.
Regulators have “rigorously tested” the company’s loss estimates, Berkowitz said, reducing the possibility that MBIA will increase its projections for paying claims causing a reduction in adjusted book value.
MBIA has reported that it expects to pay claims of $3.9 billion on structured finance securities linked to soured home loans as of the end of March. The company has estimated it will recover $1.9 billion against those claims through litigation over ineligible mortgages used to back insured bonds, said Kevin Brown, an MBIA spokesman.
While Fairholme’s MBIA investment isn’t dependent on the company restarting its municipal bond insurance underwriting, Berkowitz anticipates the company will again back municipal debt once it resolves a legal challenge over the split of its insurance unit.
In February 2009, MBIA’s Chief Executive Officer Jay Brown separated the municipal and structured finance businesses to remove the uncertainty about claims on structured-finance securities from its municipal bond insurance business.
Brown created the National Public Finance Guarantee Corp. to take over the municipal bond policies and MBIA Insurance Corp. retained its structured-finance contracts.
In response, a group of financial institutions, such as JPMorgan Chase & Co. and Citigroup that had purchased structured-finance guarantees from MBIA filed suit in New York State Supreme Court in May 2009, arguing that management unfairly removed $5 billion of capital from the insurer to start National Public Finance.
“MBIA really can’t offer municipal bond insurance until the issue of its transformation is resolved,” Berkowitz said, because the pending litigation has depressed the company’s credit ratings, which determines the value of its insurance.
MBIA will win the lawsuit, resulting in a credit upgrade and opening the door to resuming its municipal-bond business, he said.
The firm has continued to pay policyholders, unlike some of its former competitors, Berkowitz said.
“Any firm that kept its promises to its insureds, has a reasonable chance of rebuilding its business,” Berkowitz said.