ARMONK, N.Y., Feb. 14 /PRNewswire-FirstCall/ -- MBIA Inc. (NYSE: MBI),
in response to media and other inquiries, today released the text of the
letter it sent to New York Superintendent of Insurance Eric Dinallo and
other regulators in response to William Ackman's letter detailing what he
termed concerns raised by his "Open Source Model":
February 11, 2008
The Honorable Eric Dinallo The Honorable Sean Dilweg
Superintendent of Insurance Commissioner of Insurance
State of New York State of Wisconsin
Department of Insurance 125 South Webster Street
25 Beaver Street Madison, WI 53703-3474
New York, NY 10004
Ms. Linda Thomsen Mr. John W. White
Director Director
Division of Enforcement Division of Corporation Finance
Securities and Exchange Commission Securities and Exchange Commission
100 F St., NE 100 F St., NE
Washington, DC 20549 Washington, DC 20549
Mr. Mark Schonfeld Ms. Leslie Kazon
Regional Director Assistant Regional Director
Securities and Exchange Securities and Exchange Commission
Commission 3 World Financial Center, Suite 400
3 World Financial Center, Suite 400 New York, NY 10281-1022
New York, NY 10281-1022
Mr. Steve Rawlings
Securities and Exchange Commission
3 World Financial Center, Suite 400
New York, NY 10281-1022
Ladies and Gentlemen:
We have completed a review of the letter you received on January 30,
2008 from William A. Ackman of Pershing Square Capital Management, LP,
captioned "Bond Insurer Transparency; Open Source Research". We would like
to share with you our comments on the letter, including our response to
it's major errors and omissions.
The letter and the model itself are used as support for estimates of
the potential for bond insurers MBIA and AMBAC to incur claims on credit
enhancement contracts we've written on collateralized debt obligations
(CDOs) and residential mortgage backed securities (RMBS). Mr. Ackman has a
large short position in the shares and credit default swaps (CDS) of AMBAC
and MBIA by his own admission, and the letter is clearly intended to
influence the prices on those interests to his gain. Consistent with this,
Mr. Ackman develops potential loss estimates that are a multiple of those
estimated by MBIA, the ratings agencies and other serious analysts. The
"Open Source Model" is an attempt to add credibility to those estimates, as
is his assertion that the work of identifying the collateral underlying the
CDOs was conducted by "a global bank." We can only speculate as to the
reasons the "global bank" desires to remain anonymous; but we are mystified
as to how research conducted anonymously, and disclaimed by the party
bringing it to the public could aid in enhancing transparency.
The model and the data appear to have some major deficiencies, as follows:
-- The model is described as a "security by security" analysis, while it
actually uses an averaging of 1267 randomly selected securities to
estimate losses. This is a much less specific approach than the loan by
loan analysis undertaken by MBIA on most of our portfolio in
formulating our loss reserves and capital forecasts.
-- Assumptions driving loss estimates are proprietary to "Global Bank's"
trading model. This is a particularly opaque approach to enhancing
transparency.
-- The model does not take account of the structures of CDOs and our
contracts that provide us protections. The model does not appropriately
capture the triggers and cash diversion mechanisms that support the
senior interests, nor the fact that we cannot be compelled to settle
contracts in 2 years, as assumed. The ultimate principal payments on
many of our contracts will take place 30-45 years in the future, and in
8 of the 16 deals we've done in 2007, we only guarantee payments that
would occur at ultimate maturity.
-- The model doesn't take account of the tax impact of losses.
-- The analysis of RMBS transactions employs a steadily increasing default
rate which increases by the trend established in the three most recent
months. In effect, the model assumes that the elevated default rates
expected in the next 18-24 months continue for the rest of the lives of
the securities. Although it's not fully described, it seems likely that
this will result in default rates being in excess of those listed in
the appendix.
In addition to using a simplistic model that ignores many protections
built into the CDOs and applying highly conservative assumptions to
generate sensational "headline" numbers, Mr. Ackman also makes other
specific points, which are also incorrect. A brief analysis follows:
-- It is asserted that by using internal estimates of credit losses, the
bond insurers are somehow "determining the amount of statutory
capital." This is peculiar. All financial institutions who take and
manage credit risk in buy and hold positions are required to make
estimates of uncollectibility or credit impairment. MBIA has a rigorous
process for determining the amount of credit losses in our portfolio of
financial guaranty policies and our CDS contracts (it must be
remembered that our CDS have the character of financial guaranty
insurance policies, not tradable CDS as transacted by most market
participants). The process of recognizing loss on our contracts for
statutory reporting is governed by SSAP 5, which is consistent with FAS
5 (Accounting for Contingencies). Our reserves are based on reasonable
estimates of probable losses, in accordance with the guidance. There is
no provision in GAAP or statutory reporting for reserving based on
worst case hypothetical losses. In no way does the fact of internal
estimates permit a bond insurer to "determine statutory capital."
-- It is also alleged that MBIA has said that "all mark to market losses
would reverse to zero." This is incorrect. We have consistently stated
that in the absence of credit impairment, the mark to market would
reverse over time. We have made that disclosure since the advent of FAS
133, and only in Q4 2007 have we had an impairment of a contract
subject to FAS 133.
-- Mr. Ackman has been consistent in his suggestion that his estimates of
loss are more accurate than the company's. He alleged, in his 2002
attack on the company, that our portfolio subject to FAS 133 would have
$2 -- $3 billion of losses. That portfolio, which has largely amortized
or been prepaid at this time, experienced no loss. We don't believe
there's any basis for giving his current estimates any more credibility
than those from 6 years ago.
-- Mr. Ackman also suggests that the holding companies that own the bond
insurers should be starved of dividends, and that that would be a
positive development for the insurers. This is incorrect. The holding
companies facilitate capital markets access for the insurance
companies, and contribute to their financial strength. For example,
MBIA Inc. has raised $1.5 billion in equity from Warburg Pincus and the
capital market in the past two weeks. We have injected all of Warburg's
initial $500 million investment into the insurance company; and most of
the proceeds of our successful $1 billion public offering of equity
will provide additional capital to the insurer, for the purpose of
helping to ensure its very high capital adequacy. In addition to this
very obvious fact, the ratings of the holding company are dependent
upon dividends from its subsidiary businesses.
-- In the event that the bond insurers' holding companies were to be
deprived of all cash flow from subsidiaries, their rating would fall,
which would likely trigger downgrades at the insurance companies -- the
very event that the companies and the regulators are seeking to avoid.
Mr. Ackman purports an interest in "Saving the Bond Insurers," but his
cynically self serving proposals offer no such salvation.
-- Finally, Mr. Ackman incorrectly suggests that MBIA had some scheme to
avoid taking "live questions" during its fourth quarter earnings call.
Our four hour call consisted of a two hour management presentation and
two hours of questions -- about 80% of the questions, including Mr.
Ackman's, were received in advance of the call, but every one of them,
and virtually all the questions received during the call were answered.
Like Mr. Ackman, we would welcome the opportunity to meet with you to
discuss any or all of these points. MBIA has been a Triple A company for 34
years, and we are now, and expect to continue to manage our business in a
prudent manner, deal forthrightly with any problems that arise in our
portfolio, and provide disclosure to the market that enhances an
understanding of our business model and our industry.
Sincerely,
Gary C. Dunton
cc:
Moody's Investor Service:
Jack Dorer
Stanislas Rouyer
Standard and Poor's:
Dick Smith
David Veno
Fitch Ratings:
Keith Buckley
Tom Abruzzo
This release contains statements about future results that may
constitute "forward-looking statements" within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that these statements are not guarantees of future
performance. There are a variety of factors, many of which are beyond
MBIA's control, which affect the operations, performance, business strategy
and results and could cause its actual results to differ materially from
the expectations and objectives expressed in any forward-looking
statements. Accordingly, readers are cautioned not to place undue reliance
on forward-looking statements which speak only as of the date they are
made. MBIA does not undertake to update forward-looking statements to
reflect the impact of circumstances or events that arise after the date the
forward-looking statements are made. The reader should, however, consult
any further disclosures MBIA may make in its future filings of its reports
on Form 10-K, Form 10-Q and Form 8-K.
MBIA Inc., through its subsidiaries, is a leading financial guarantor
and provider of specialized financial services. MBIA's innovative and
cost-effective products and services meet the credit enhancement, financial
and investment needs of its public and private sector clients, domestically
and internationally. MBIA Inc.'s principal operating subsidiary, MBIA
Insurance Corporation, has the following financial strength ratings:
Triple-A from Fitch Ratings with ratings on Rating Watch Negative; Triple-A
on CreditWatch with negative implications from Standard & Poor's Ratings
Services; and Triple-A on review for possible downgrade from Moody's
Investors Service. Please visit MBIA's Web site at http://www.mbia.com.
SOURCE MBIA Inc.
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Related links:
http://www.mbia.com
CONTACT:
MBIA, Media, Willard Hill +1-914-765-3860, or
Elizabeth James +1-914-765-3889, or MBIA, Investors, Greg Diamond
+1-914-765-3190
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