MBIA shrugs off default bets

MBIA (MBI) chief Jay Brown says the market is vastly underestimating the bond insurer’s financial strength. Brown, in his latest letter to MBIA’s shareholders, says the market for credit default swaps indicates MBIA has a 60% chance of defaulting on its debt in the next five years. But he calls that bet “perplexing,” saying the company faces no principal payments and just $80 million of interest payments over the next year, and holds $1.6 billion in cash and short-term investments.

Of course, it’s not MBIA’s own numbers that the market is worried about. Critics have been more focused on how MBIA will shoulder future claims tied to its guarantees of collateralized debt obligations and other deteriorating mortgage-related securities. Brown doesn’t spend much time addressing those concerns, though he says the company’s $28 billion of insurance-guarantee liabilities “are backed fully by the $28 billion of existing assets dedicated to this asset/liability management business that also reside at MBIA Inc.” That’s not to say that Brown doesn’t regret MBIA’s foray into the CDO business: “Make no mistake about it, we wrote some business that in hindsight we wish we hadn’t, and those decisions have certainly had an impact on the market’s confidence in MBIA,” he writes.

Still, he insists it makes no sense for MBIA credits to trade as if the company is in dire straits financially and wonders, referring to investors who have bet against MBIA, “is it just that we are being used as a ping-pong ball in a high stakes games by the big guys?”