It is a scarry weekend for MBI shareholders because most longs know that the Q1 loss will be higher than the published analyst estimate due to credit spread widening and mark to markets on credit default guarantees. Everyone remembers how much ABK dropped on their headline and is thus fearful that MBI will fall like that on their headline.
The upside however is that credit default spreads have rallied greatly since the end of Q1, so likely these marks taken will get reversed to some extent in Q2. With the mortgage market pretty much known and priced in, these resulting mark ups will likely lead both ABK and MBI to report profits in Q2 and possibly large profits at that. I believe this is why ABK had its miraculous rally from $3.2 low all the way to $5.50. Fact is that Q1 was the worst quarter.
So what happens Monday. I believe that the huge bounce in ABK, the 3 day slide in MBI into earnings, the recent shareholder letter from the CEO last week reasuring that their is no need for more equity raise, and the fact that the options markte is showing little chance of volatitity...all point to the conclusion that MBI will not be down big on Monday. If financials are green monday I expect MBI to be up monday if i had to guess. If it does fall i think it will be a buy like ABK was because next quarter reports should be very good I think relative.
This analysis borders on sophistry.
Everyone knows that CDS spreads have narrowed. That is not news. But what you fail to mention, probably out of ignorance, is that the way MBIA "marked" these to market already took into account that the spreads would narrow in this way.
Their are different ways to "mark" to market and, as always, MBIA took the rosy scenario approach.
In terms of the mortgage declines being fully discounted, that is just plain silly.
But again, you miss the KEY point that the PRINCIPAL source of new MBIA revenue, i.e. writing new policies, has EVAPORATED.
California, New York and New Jersey have all left. And many others are now following their lead.
THAT is the big picture.
It is fine that there isn't much new business right now. MBI doesn't have much new capital to delploy at the moment.
Anyway, even if you assume that no future business will ever be written, it doesnt' mean the existing policies written are any less valuable or whatever the realistic book value of the company is, is worth any less.
If it isn't bond insurance, they can find another way to deploy their capital in the future. Other lines of business ect.
You are missing the KEY point.
MOST of the MBIA's revenue, according to them, comes from writing new insurance.
And what you ignore is that some of their VERY biggest clients, namely the states of New York, California, New Jersey and others have now decided that MBIA charges too much.
Those customers, some of the very biggest of MBIA's were supposed to be THE biggest source of new revenue for MBIA.
These large governmental entities, with their tens of billions in bonds that come to market every year, are going two different routes. Some of them are foregoing insurance altogether, while others are going over to Buffet's operation.
But they are abandoning MBIA in droves.
You are missing the BIG point.
MBIA says it doesn't need more capital, is writing business
Wednesday May 7, 8:34 am ET
MBIA says it doesn't need more capital and isn't using the $1.1 billion it raised
ARMONK, N.Y. (AP) -- Bond insurer MBIA Inc. says it has the liquidity it needs in its insurance and asset management segments and won't spend the $1.1 billion it raised until it boosts capital in the insurance unit and decides how it will run the business long-term.
In a letter to investors late Tuesday, MBIA Chairman and Chief Executive Jay Brown said the company has enough assets to meet maturing liabilities and to post collateral in the event of downgrade from credit rating agencies. He continues to believe the company does not need to raise more capital.
In February the company raised $1.1 billion, selling a 40 percent equity stake in itself to stave off downgrades from credit ratings agencies concerned about its ability to pay claims on the bonds it insures. Bond insurers without top-caliber financial-strength ratings from all three agencies will have trouble winning new business. Moody's and Standard & Poor's affirmed its "AAA" rating, with a negative outlook.
The company also said that comments made by billionaire investor Warren Buffett, that the equity and debt markets aren't viewing bond insurers like MBIA as triple-A, are accurate. However, it has written new business in insurance and asset management in the first quarter. Buffett launched bond insurer Berkshire Hathaway Assurance after the credit crisis impaired the ability of other bond insurers to do business.
Brown said he expects there to be a wide range of opinions about the fair value of its credit derivative liabilities when it reports first-quarter results next week, and that it will provide information about how it derives its assessment.
"I continue to believe that investors in MBIA should understand that this number is nothing more than a barometer of credit market sentiment and market liquidity or illiquidity and does not accurately reflect the actual losses that would be expected at MBIA," Brown said in the letter.
MBIA is scheduled to report first-quarter earnings on May 12.
Who knows what will happen with fair value losses, but the first quarter credit impairment losses derive 100% from the mezzanine ABS CDOs. The deals are very risky and will probably account for a big chunk of Ambac's ABS CDO losses, but there are three other deals ($4B of exposure) that are internally rated below investment grade as of 3/31/08. Losses on these and a handful of others seem likely.
If large credit impairment charges are necessary next quarter, it will further damage Ambac's credibility with investors. Since credit impairment losses are so much lower than the fair value losses, why not report a more conservative credit impairment number?
I showed this message to a friend who works for FGIC, she got a great laugh out of it. She really did think it is a joke. "No they won't. They wont show profits until 09 if they are lucky. We all still have deals that are deteriorating".
Just to give you an idea of my position- I am long having bought at $9, but I also own a bunch of $11 puts. This company will turn around eventually; 1-2 years maybe.
What I am getting at specifically is ABK took a $1.7 billion mark to market loss on credit derivative exposure in Q1. Of this $1.7 billion was $900 million reserve for what they expect their losses to actually be. The extra $800 million was due to marking to market credit spreads because of market movements. Some of these spreads have tightened since the end of the quarter. So some of the $800 million might be written back up as profit in the next earnings report.
Lets say they don't have to make any increase to the $900 million reserve and they are able to write back up $200 million for credit marks improvement. ABK could then report earnings of $.75/share next time around.
Wake up your dreaming look for bad bad results and a stock price in the $6..not to mention more layoffs and closings...many have also mention that they didnt need an infusion of cash...all lies they will need infusion and they may make an announcement prior to the release of earnings that they do have an infuser for the cash they need....down she goes on monday...sorry