Josh Rosner got in touch after I said he was "full of crap" for saying that MBIA thinks it can’t make its obligations. He’s been talking to NYSID too, so I asked him to elaborate on exactly what he thought was going on with MBIA. He said that
The NYSID is relying on the rating agency assumptions and has repeatedly told me this.
This surprises me, since it would seem to constitute the NYSID effectively outsourcing a large part of its regulatory function to the ratings agencies.
Rosner continued:
Moody’s analysis, at their own admission, has rated without regard for either acceleration triggers or mark to market losses.
I haven’t seen Moody’s say this, but I can believe that it’s true. The CDS written by MBIA get accelerated (and can be tendered at mark-to-market rates) only after what most of us would consider an event of default – so there’s a good case to be made for not including such an eventuality in determining the probability of such an event.
In any case, said Rosner, the language in those CDS contracts might well not be worth the paper it’s written on, since "NYSID told me in no uncertain terms that they would rip up the CDS before they let them pay out to the detriment of muni policyholders".
I expect that the NYSID would ultimately attempt to abrogate any attempts by counterparties to use the acceleration clause. That is not to say I agree that it is right to violate contracts that the NYSID knew existed nor is it to say that I believe they could do so without it leading to protracted court challenges, rather it is to say that is my expectation of what they would likely do to protect claims paying resources for muni policyholders.
I think he’s exactly right on this front.
I then asked about his view of whether MBIA was able to meet its obligations, assuming the CDS aren’t accelerated but rather simply pay out only when the underlying reference security defaults. He replied:
If policies were all to pay over time, assuming no further degradation in the macro economy and thus deterioration of CMBS and other commercial asset classes they should be close to being able to meet their obligations at maturity. I do, however, expect further deterioration so, at this point, I am comfortable saying that no one can honestly tell you whether they will ultimately have enough $.
Again, this seems reasonable to me.
Finally, Rosner talked about something which hadn’t even occurred to me: if MBIA does set up a new insurance subsidiary, should it be a sister to the existing one, or should it be a subsidiary of the existing one?
I personally believe, that the new company should be stacked under the old insurance co so that the policyholders have the benefit of any future appreciation of that business and to aid its capital position. While management and the rating agencies seemed to prefer that a new company be a sister (under the holding co) as opposed to stacked under the old co it may now be easier to do it as a stacked co given the higher rating on the old operating co than the holding co.
Subsidiaries nearly always have a higher rating than their parents, so not much has changed there. But I’m entirely agnostic on this particular issue. The really important question is whether the $900 million stays within MBIA at all, or whether the company tries to give it back to shareholders somehow. NYSID would be quite unhappy if MBIA tried to do that, but Jay Brown has definitely raised the possibility, and Yves Smith says that "if the executives were really out to maximize shareholder value, which is widely asserted to be their primary duty, that’s precisely what they’d do".
I’m pretty sure that NYSID is going to ensure that MBIA keeps that $900 million in-house. But exactly how it ends up being used is still very much up in the air.
I still don’t for a minute agree with the Rosner quoted in the NYT article on Wednesday. I think that Jay Brown does have faith in his insurance subsidiary, and, for what it’s worth, I think that NYSID and Moody’s have quite a lot of faith in it too. But ex that quote, I will say that Rosner makes a fair amount of sense.