MBIA , FNM, & GM

With little fanfare the S&P downgraded MBIA to Strong Sell today.
The downgrade is significant in that it came from the S&P, it was to "strong sell" (a rating rarely seen), and it was to a company that matters.

For those not familiar with MBIA, it is engaged in providing financial guarantee insurance, investment management services, and municipal and other services to public finance, and structured finance clients on a global basis. MBIA has $6.6 billion of equity book value compared to $490 billion of guarantees. If MBIA has a problem, then stocks and corporate bonds are going to have a problem. If MBIA has a huge problem there is bound to be a massive problem somewhere else. MBIA is enormously leveraged in derivatives.

In Greenspan's derivative miracle world that leverage is irrelevant because all of the risk has been offloaded to Pluto, Mars, or France. In the real world, however, a chain of events "accident" could simultaneously ripple thru the entire corporate world affecting all of the key derivative players such as MBIA, FNM, JPM, and others.

Of course that is a low probability event which means that none of this matters until it matters, as shareholders of FNM had recently found out. It was not until FNM lost $4 billion dollars trading mortgage derivatives did anyone care. In fact, there was little concern even AFTER FNM lost $4 billion dollars. It was only when the mess was so bad that SEC filings were delayed for 6 months and possibly for another year longer did anyone notice or care. Since then FNM has quietly fallen from over $70 per share to a new 52 week low today of $53.

MBIA is now restating financial results dating all the way back to 1998. The company describes its fundamentals as "challenging." It was downgraded to strong sell today by the S&P yet its debt analysts left its triple-A rating credit rating intact. A strong sell AAA rated company: Is this a first?

Egan-Jones, an independent credit-research shop that is often ahead of the curve with its gutsy debt ratings, lowered MBIA to double-A-negative. In its report, Egan-Jones noted how MBIA's new policy sales dropped to $200 million this year from $568 million last year "because of reduced demand and increased competition." Egan-Jones also said investors should "expect fines and curtailment of business lines" and argued that it doesn't deserve a triple-A credit rating "because of the slim capital.

MBIA prides itself on that rating, which is required to insure municipal bonds. That of course explains full well why a downgrade of their debt by a major credit rating agency will be put off for as close to forever as feasibly possible. Egan-Jones can get away with a downgrade because they get paid to be accurate. The S&P, Moody's, and Fitch all have business relationships to maintain (nudge nudge wink wink).

In Dark Clouds Over Detroit I argued that the real story in GM's recent implosion was NOT the implosion itself but the fact that Fitch, Moody's and the S&P have not and will not cut GM's rating to junk. I called for the SEC to crack down on the relationship with rating companies and their clients.

No one wants to be the first to upset a relationship or to spook the equity markets with a downgrade on a company as large as GM or MBIA. As with GM, a credit downgrade of MBIA will not occur until the market is fully prepared for it in advance or there is a major blowup, whichever comes first.

How many times do Moody's, Fitch, and the S&P have to prove they can not police themselves?

Meanwhile the beat goes on.

The rating agencies get away with this because they can. No more no less. Has greed ever been greater? Have we learned nothing from the 2000 NazCrash? Oh well, like the housing bubble, the stock market bubble, the junk bond bubble, and the credit bubble which is fueling all of the other bubbles, this will not matter until it does.

Tick Tock Tick Tock.

Mish