So Why Did MBIA Raise $1.1 Billion? To Pay Executives, Apparently

MBIA has brazenly advanced its own interests at the expense of investors and policyholders. A partial list:

Issuing a disappointing earnings release in the middle of the night in the hopes that it would garner less attention that way

Asserting it needed no more capital while the Dinallo-led “save the monolines” effort was still underway. CEO Gary Dunton’s claim was so patently bogus that it stirred the normally circumspect S&P to issue a swift rebuke

Telling the one major rating agency that has the guts to give the bond insurer the less-than-AAA it deserves to take a hike (fortunately, Fitch is ignoring that directive)

Admittedly, some of these unsavory actions took place on ousted CEO Gary Dunton’s watch; we now have Jay Brown in charge. However, old habits die hard.

The latest stunner is that the money raised in MBIA’s last, hugely dilutive equity sale is being held at the parent company. For those who have not followed the monoline saga, that’s scandalous.

The whole purpose of the fundraising was for the parent to then downstream the proceeds to the insurance subsidiaries. That’s where the insurance is written, that’s where the capital shortfall is.

So why is MBIA hoarding cash at the parent level? Well, executives (along with other corporate charges) are paid out of the parent company’s books. The subsidiaries can dividend cash up only if the are profitable OR get permission from their regulator.

The big bond guarantors have been notably loss-making of late. Eric Dinallo says that both MBIA and Ambac may need to raise more capital. The monolines’ business model is toast. The structured finance business involves bona-fide risk transfer, and the bond guarantors’ capital bases (equity is less than 1% of assets) is far too thin to allow for that, particularly when an AAA rating is essential for conducting business; the nearly risk free ratings arbitrage in the muni finance business is going the way of the dodo bird (and with local government budgets under stress, even that old supposedly cosmetic credit enhancement may wind up leading to some unanticipated losses).

So how does the hoarding of cash fit into this picture? Well, Bill Ackman, the hedge fund manager who was leading the campaign against the monolines, argued that they should be put in runoff mode, with the investors at the parent level sacrificed to preserve the claims-paying ability of the subs. That’s a course of action the regulators would almost certainly arrive at on their own if they thought the bond insurers were in peril.

So what does the holding of so much cash at the parent level mean? Aside from being a shameless case of duplicity, it says one of two things, neither pretty. First, they expect losses for the foreseeable future, and expect the regulators to prohibit dividend payments too. But withholding the entire $1.1 billion is an admission of how bad they expect things to get. Or second, they expect the regulators to put MBIA into runoff mode, and are keeping their cash to support the parent level empire that would otherwise be starved out of existence. But if so, the representations made by management about the soundness of the company are false.

No matter how you slice it, the sequestering of funds is wildly inconsistent with management’s position that MBIA has a good future, or indeed any future at all.

From Bloomberg:

MBIA Inc. has yet to pass on $1.1 billion of capital to its insurance subsidiary, three months after raising the money to defend the unit’s AAA credit rating.

The cash, raised in a February stock sale, is being held at the parent company while Armonk, New York-based MBIA develops a plan for the company’s legal and operating structure, MBIA Chief Executive Officer Jay Brown said in a letter to shareholders released yesterday.

“Given the more than adequate liquidity in both our insurance and asset management businesses, there is no compelling reason to move this cash at this point,” Brown said.

MBIA was criticized by Fitch Ratings, which said on April 4 the decision raised the risk that the cash may not end up as capital for the insurance unit as MBIA had promised. While Fitch downgraded MBIA to AA from AAA, Moody’s Investors Service and Standard & Poor’s cited the capital raising as a reason for keeping the insurance unit at AAA.

Regulators are waiting for MBIA to contribute the funds, according to New York State Insurance Department Deputy Superintendent for Property and Capital Markets Michael Moriarty.

“It was never our expectation that the funds raised would go anywhere other than to the insurance subsidiary,” Moriarty said. MBIA spokesman Jim McCarthy declined to comment…..

“S&P and Moody’s are being a bit disingenuous by affirming the AAA on the insurance company based on their ability to raise capital, even though the capital isn’t there,” said Joshua Rosner, managing director at New York-based research firm Graham Fisher & Co. “The rating seems unjustifiable.”

MBIA said in a February statement that it would “contribute most of the proceeds of the offering to the surplus of its subsidiary, MBIA Insurance Corporation, to support its business plan.”

Moody’s assigned a negative outlook to MBIA’s rating in part because the money wasn’t transferred to the insurance unit, Stanislas Rouyer, an analyst in Moody’s financial guarantor group, said in an e-mailed statement.

“The proceeds from the capital raise remaining at the holding company is one of the factors considered in our negative outlook,” Rouyer said.

Fitch, a unit of Paris-based Fimalac, said MBIA’s insurance unit needs $3.8 billion, in addition to capital already raised, to warrant a AAA. MBIA in March asked Fitch to stop rating its debt because of disagreements over the model Fitch uses to estimate losses. Fitch relies on other ratings companies for data and its analysis is limited, MBIA said.

“Since a significant portion of the capital that was recently raised by MBIA Inc. still resides at the holding company level, the insurance company’s capital position could become pressured in the future by possible liquidity demands at the holding company,” Fitch analyst Thomas Abruzzo said in a report.

Note that S&P, unlike Fitch ad Moody’s, is not upset that the cash has not been downstreamed.