Barron’s Bold Stand On MBIA, Inc.

Originally Published In the News January 22, 2007 10:01 AM

The bond insurers have been a disaster, and the biggest reason the market selloff accelerated beginning Thursday. Beware of bloggers who are just hopping on the bandwagon. We don’t know if Barron’s will be proven right in their constructive piece on MBIA (MBI-NYSE) this weekend, but they were correctly bearish months ago, and stock is bouncing today:

Credit protection on MBIA’s debt likewise jumped to a first-year cost of $3.1 million per $10 million of debt exposure and an insurance-premium cost of $500,000 a year for the next four years, according to Bloomberg. This implies a more-than-70% chance that MBIA will default on its debt in the next five years, Bloomberg added.

The reasons behind the latest collapse are several. Worries have grown that MBIA’s statutory capital—which, following the completion of its capital raise, will stand at around $8 billion—won’t be enough to make good on the subprime-securities default risks embedded in a $652 billion portfolio insured at par value. Barron’s

The Fed’s emergency rate cuts seem to be throwing the market a lifeline, and most financials are trading higher this morning. Perhaps MBIA’s sickening plunge is over. But is Barron’s thesis overly optimistic?

....some observers claim that, conservatively, the present value of MBIA’s liquidation value in run-off is likely to be $30 to $40 a share. If true, it would appear that MBIA has long way to go on the upside, dead or alive.

The stocks of bond insurers are the key to the market’s direction.

MBIA: Priced for Catastrophe
Barron’s
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