MBIA’s New Structure

It’s taken rather longer than anybody exepected, but MBIA has finally put in place its long-promised plan to split up the company into its component parts, with the relatively strong public finance insurer getting a new name — National Public Finance Guarantee Corporation — and being insulated from any of the structured-finance liabilities which have devastated the company’s credit rating and share price.

I spoke to Jay Brown, MBIA’s CEO, this morning, and asked him a few of the obvious questions.

The first one was whether this corporate restructuring is going to do any good: will National actually write any business in practice?

Brown said that realistically not much is going to happen in terms of writing new business until MBIA files standalone financial statements at the end of the first quarter: "that will provide a lot of clarity", he said. He did add, however, that if you’re holding municipal bonds which were wrapped by MBIA in the past, the new structure should be a relief to you pretty much immediately, since MBIA is making every effort to make National as bankruptcy-remote as possible.

From the point of view of the holding company, less has changed: it still owns the same mix of businesses it had before. But now they’re more clearly delineated, which means they’re easier to deal with separately, which might help increase value; MBIA’s shares are up 17% in early trade, but still near their all-time lows below $5.

As for the people who hold structured products guaranteed by MBIA, they’re not substantially worse off than they were before, just because they’ve already marked down their MBIA wraps to almost worthless.

Going forwards, of course, the big task facing Brown is to persuade the markets that National’s guarantee is really worth something. To that end, he’s taking a page out of Barack Obama’s book:

It’s an uncertain world out there. We’re going to be pushing a very transparent company. Starting today we’re putting up on our website every policy the company insures, with transparent financials.

But do investors really have the time or the inclination to go through all that information and judge for themselves how creditworthy National is? Isn’t the whole point of a bond insurer that investors are lazy and don’t want to do that kind of work and are much happier just relying on a triple-A rating? And isn’t that now a thing of the past, never to be repeated?

On the other hand, municipalities, especially small ones, and especially the ones with a lot of auction-rate securities still outstanding, are desperate to refinance their debt and are finding the markets essentially closed right now. If National can help them at all, it might be able to make the difference between getting a bond away and not being able to issue anything.

Brown knows it’s going to be slow going: "We started 35 years ago," he says, "and took the better part of a year to sell the first policy." But at least now there isn’t any uncertainty about MBIA’s structure going forwards.

And he also cleared up a bit of confusion I had about the regulatory status of National: although right now it’s an Illinois company — it’s being created out of an insurer MBIA bought in 1989 — the regulators in both Illinois and New York have agreed that MBIA can move it to New York. So New York State will still be MBIA’s regulator, not Illinois: there’s no forum-shopping or regulatory arbitrage going on here.

There’s still going to be lazy investors out there, people didn’t do much work at all on anything. We’re going to have to see how this market develops over the next few years. There were $400B in bonds issued last year.

I’m still far from convinced that the bond-insurer business model really works any more, or, for that matter, any business model which was or is reliant on a triple-A credit rating. And National might be asked to start paying out on its insurance policies pretty soon, if municipal finances continue to deteriorate. But if it can do that happily and still retain its financial strength, there might conceivably be a future for it yet.