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  • nilsdegraaf nilsdegraaf Feb 18, 2010 1:31 PM Flag


    That was a quick conservative estimate of the expected revoveries on the Credit Suisse deal. However, I must admit that I don't expect these recoveries to be booked over Q4 unless MBIA opts for booking put back recoveries based on "extrapolation" (similar to what Ambac did over Q3).

    Below the maths:

    First a gestimate of the expected losses on the CS deal (based on the lawsuit information):

    * "a total of $464m of loans have already defaulted"
    * "MBIA made $296m of payments already"
    * I guess the difference between the two being the attachment point, i.e. $168m, ca. 19%
    * "from a random sample of defaulted loan files, 79% breached reps & warranties"
    * "51.5% of the pool already has defaulted"

    Let's assume MBIA made reservations based on another 50% losses on the remaining outstanding pool:
    * 50% over 436 of loans = $218m

    Total losses: $464 + $218 = $682m (over a 900m deal)

    Loss threshold: 168m

    Total losses and loss estimates booked by MBIA:

    * $682m - $168 = $514m

    Total put back recoveries to be expected:
    * Assume 79% put backs: 79%* 682m = $539m
    * Since the $539m is larger than the expected losses, MBIA will book, some day, a recovery of $514m minus
    the $78m already reported, i.e. $436m (514-78)

    This $436m recovery is the number they

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    • You definitely deserve some credit for more analysis than the typical message board bonehead, but if you really believe these types of recoveries, I think you are in a fantasy world.

      The description of the “breaches” that are cited in MBIA’s complaints paint a much murkier picture. In the end, I think it is very unlikely that a court will require buybacks except in cases of clear breaches (i.e., not most of the loans MBIA has cited).

      Even if MBIA were technically able to recover these amounts, it would not be possible, because the banks would not have the money. The CSFB deal and MBIA’s other CES and HELOC deals are substantially the same in terms of underwriting quality as trillions of dollars of other first and second lien securitizations. If originators were required to repurchase all of the loans in RMBS pools that breach reps and warranties according to MBIA’s definition, it would render our banking system insolvent multiple times over.

      I agree with Chris Whalen that repurchases will extract a pound of flesh. However, the majority of losses will be borne by RMBS holders. For the most part, these losses have already been recognized (and then some) via impaired MBS valuations.

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