MBIA: The View From New York State

I had a very interesting conversation with Hampton Finer of the New York State Insurance Department this afternoon, on the subject of MBIA. He’s a regulator, it’s his job to be worried about the entities he’s regulating. And when one of those entities has seen its share price drop from $69 to $6 in the space of less than a year, one can understand why he might be more worried than normal. That said, however, the overall impression I got was that NYSID has a pretty constructive attitude towards MBIA, is not worried about its claims-paying abilities, and is not particularly upset about the insurer’s failure to send $900 million downstream to its insurance subsidiary.

MBIA "needed a capital infusion to help them ride this out at triple-A," said Finer: "they weren’t hitting the rating agency ratios". This is almost exactly the same as the Jay Brown talking points. The capital-raising was done for the sake of the ratings agencies, and once the ratings agencies said that it wouldn’t do any good, there was no obvious point in doing so any more.

Was NYSID upset that MBIA didn’t send the money downstream? Not particularly. If it had really wanted MBIA to do that, it could have forced the issue, but it didn’t. "We have a lot of authority over how that money gets used," said Finer. "We’d like to see what else can be done with it." If that involves sending it to a different subsidiary, that might be fine; the only thing he seemed keen not to see was the money getting sent directly back to shareholders.

More generally, is NYSID concerned about MBIA’s solvency? No. He was pretty unambiguous about that:

We think there’s enough money to pay all the claims based on what the current expected losses are. Things have deteriorated a little bit, but whatever gauge you want to use, the current claims-paying resources in the industry for MBIA and Ambac are going to be sufficient to pay all the losses on the policies they wrote.

But isn’t MBIA already technically insolvent, in that it can’t afford to reinsure all of its guarantees? Maybe, said Finer, but "in markets where there are liquidity issues, that might not be the most reliable test of solvency", and in any case "coming up with a reliable answer about whether they can reinsure is difficult". MBIA has $16 billion in claims-paying abilities; that’s enough to buy a lot of reinsurance.

And what about this latest storm over MBIA’s credit default swaps being accelerated if the company gets taken over by its regulator? Well, for one thing, if MBIA goes below its minimum capital requirements, NYSID is not obliged to take it over. The regulator would of course step in if MBIA looked as though it was about to declare bankruptcy or otherwise have an event of default. But there’s a very long way to go before things get that drastic.

That said, Finer was no fan of the language in those credit default swaps: in fact he called the relevant clauses "poisonous provisions". The reason is that if the CDS gets terminated at a mark-to-market price, the buyer of protection can easily end up getting paid, in panicky markets such as this one, much more money than he would ever get if he simply held the insurance to maturity.

On the other hand, said Finer, "we believe there are ways of controlling those events of default".

Finer was also keen to see MBIA back in the business of writing insurance again. "We don’t really want companies in indefinite run-off, they’re kind of poisonous," he said, since such companies have much less incentive to pay out than one which stands to lose a lot of business if it starts denying claims. "Companies should be downgraded, frankly, in indefinite runoff."

What about a corporate structure where the old insurance subsidiary was in de facto runoff while a new subsidiary was writing new policies? That could be made to work, said Finer, so long as the reputation of the new subsidiary rested to some degree on the alacrity with which the old subsidiary paid its claims.

My opinion – and this is just my opinion, it’s not something that NYSID has told me – is that NYSID’s biggest worry with respect to MBIA is not the company’s solvency, but rather its ability to persuade anybody to buy insurance from it in future. MBIA has lost an enormous amount of reputation at this point, and if no one’s interested in the products it’s selling, then eventually it might have to be taken over just because it’s not writing any new policies. But that’s a medium-term worry. In the short term, MBIA has to work out what it’s going to do with its $900 million, and whether it’s going to have to take any further write-downs, on top of the charges it’s taken already. And so long as Jay Brown wants to invest that money in his business somehow, I get the feeling that NYSID is likely to be reasonably supportive.

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