Thursday, December 20, 2007

S&P: The other victim of the MBIA announcement

(Felix Salmon) David Gaffen has a good round-up of reactions to MBIA's announcement that it is carrying $8.1 billion of nuclear waste CDO-squared on its balance sheet.

The main puzzle seems to be this: S&P knew all about this when it affirmed MBIA's triple-A credit rating (see below). But the markets clearly don't think that MBIA is nearly as creditworthy as S&P does. So while today's news is undoubtedly hurting MBIA (the stock closed down 25% on the day), it might well have equally nasty medium-term repercussions on S&P, whose main currency is its reliability and trustworthiness. Here's Gaffen:

While the ratings agencies were able to downgrade ACA, a less important insurer, they seem to be engaging in a "cross this line and you die...ok, this line and you die" Yosemite Sam-style game with MBIA and others.

It really is ridiculous how much stock is placed in credit ratings. It puts the ratings agencies in an impossible condition, and forces them to move in smaller increments and less frequently than they would if they were being completely honest. Maybe a general move towards taking them less seriously would, weirdly enough, make them more reliable.

MBIA Further Addresses Previously Disclosed $30.6 Billion Multi-Sector CDO Exposure
The information posted on December 19, 2007 discloses no additional Multi-Sector CDO exposure. The information provides detail on the composition of MBIA's $30.6 billion Multi-Sector CDO exposure that had previously been provided in its Operating Supplement. MBIA discussed its exposure to CDO transactions with inner CDOs ("CDO-Squared") during a conference call for investors on August 2, 2007.
Standard & Poor's, Moody's and Fitch have confirmed that this information was provided to them and was taken into consideration in their recent ratings analyses. The information was also made available to Warburg Pincus prior to their entering into the previously disclosed Investment Agreement, and that agreement is not affected by this information.
The additional detail being provided today in the Table below describes the collateral composition of MBIA's CDO-Squared transactions. The purpose of this information is to provide further detail about MBIA's Multi-Sector CDO portfolio. MBIA had not previously detailed these transactions because they contain less than 25 percent direct U.S. RMBS collateral.

(1)CDOs of Multi-sector High Grade Collateral

Collateral as a % of Total Pool
Year Net Par (Sub CBO/ CDO of Other
issued ($ mil) RMBS -prime) ABS CLO ABS CDO Total
--------------- ---------------------------------------------------

2004(2) 1,350 0% (0%) 0% 71% 18% 11% 100%
2005 1,430 20% (20%) 0% 61% 15% 4% 100%
2006 1,115 24% (22%) 0% 50% 21% 5% 100%
2006 1,077 21% (21%) 4% 29% 38% 8% 100%
2007 990 22% (15%) 0% 38% 34% 6% 100%
2007(3) 2,175 0% (0%) 0% 50% 12% 2% 100%
total 8,137

Original Base Current
Net Par AAA/Aaa Subordination
Year issued ($ mil) Subordination Below MBIA

2004(2) 1,350 3.5% 10.0%
2005 1,430 3.9% 10.0%
2006 1,115 4.1% 10.0%
2006 1,077 8.4% 13.0%
2007 990 4.3% 15.0%
2007(3) 2,175 3.0% 13.0%
Sub-total 8,137

(1)MBIA's CDOs of Multi-Sector High Grade Collateral are diversified transactions generally anchored by CBO/CLOs and containing buckets of other collateral including highly rated tranches of CDOs of ABS collateral. No one transaction contains more than 38% of CDOs of ABS collateral as a percentage of the total collateral base. The deals are diversified by collateral and vintage, with 47% originated from 2005 and prior, 30% from 2006 and 23% from 2007. The underlying collateral ratings as of 12/10/07 remain strong with approximately 70% of the underlying collateral is rated AAA; 17% rated AA; 8% rated A, 3% rated BBB and 2% rated BIG.

(2) All underlying collateral is rated Aaa/AAA. (3)All underlying collateral is rated Aaa/AAA. Also, percents do not total to 100% due to 36% unused commitment. Based upon purchase price and rating requirements, remaining collateral inclusions are not expected to be CDO of ABS.

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