Cost of a Downgrade: MBIA Warns of $7.4 Billion Loss

It didn’t take long for last week’s downgrade of monoline bond insurer MBIA Inc. (MBI) to hit the firm’s bottom line; the company said late Friday that it will likely have to post $7.4 billion in payments and collateral tied to its asset management business — a separate business line that underscores the complexity of the business structure at large monline insurers. News of the expected loss comes as Moody’s Investors Service said late Thursday that it had downgraded core ratings of the monoline bond insurance subsidiaries of MBIA and Ambac Financial Group, Inc. (ABK). MBIA’s asset management business manages $25 billion for investors. In the wake of the downgrade, the firm will have to pay $2.9 billion to satisfy potential termination payments under so-called guaranteed investment contracts (GICs, for most of us); another $4.5 billion in eligible collateral will likely have to be posted to satisfy potential collateral posting requirements under its GICs as a result of the downgrade, MBIA said in a press statement. Guaranteed investment contracts are similar to certificates of deposit that can be purchased at banks; they are usually considered safe investments, and pay interest from one to five years. The downgrades at MBIA, however, underscore the complexity of risk at large monolines. MBIA said that it has $15.2 billion to manage the claims, including $4 billion in cash and liquid short-term investments. Insurers like MBIA provided the top-rated portions of private-party RMBS and related CDO deals with a guarantee that essentially was designed to serve as a proxy for the government guarantee that exists on Fannie/Freddie/Ginnie mortgage bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it — especially for banks, who now must account for counterparty downgrades in their upcoming estimates of exposure to such toxic financial instruments as collateralized debt obligations. In mid-Feburary , Oppenheimer & Co. analyst Meredith Whitney estimated that Citigroup Inc. (C), Merrill Lynch & Co. (MER) and UBS AG (UBS) — three firms with the largest relative exposure to the monolines — could face losses of more than $10 billion were downgrades to materialize. Disclosure: The author held no positions in publicly-traded firms mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.