MBIA Details Huge Mortgage Exposure, Shares Collapse

By Walden Siew

NEW YORK (Reuters) - MBIA Inc, the world's largest bond insurer, said it had guaranteed $8.1 billion of the riskiest mortgage securities, imperiling its entire net worth and sending its shares plunging 26 percent.

The company said it had guaranteed $30.6 billion of complex mortgage securities in total. The disclosure threatens to set off a chain reaction that could lead to larger write-downs at Wall Street banks.

"We are shocked that management withheld this information for as long as it did," Morgan Stanley said.

"This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' relative to Ambac," the second-largest bond insurer, said a Morgan Stanley report co-written by analysts Ken Zerbe and Yoana Koleva.

MBIA's stock fell to a 13-year low on Thursday in its biggest one-day decline ever, bringing its total drop this year to more than 70 percent. The stock, which closed at $19.95 on Thursday, had hit a record high in January.

The cost to insure MBIA bonds also soared to new records.

MBIA is most vulnerable to guarantees on $8.1 billion of collateralized debt obligations, or CDOs, most of which includes the riskiest debt known as CDO squared, or CDOs backed by other CDOs. MBIA detailed its exposures on its Web site late on Wednesday. The company's net worth as of Sept. 30 was $6.5 billion.

MBIA said in a statement late on Thursday that the CDO squared exposures were discussed with investors on a conference call on August 2, and the information was also made available to rating agencies Moody's Investors Service, Standard & Poor's and Fitch Ratings.

The insurer added that buyout firm Warburg Pincus LLC was aware of the exposures prior to making its investment in the company, and that the investment is not affected by the information.

Rating firm Egan-Jones Rating Co. earlier said that the announcement may scuttle the Warburg investment.

Warburg said on Dec. 10 it would initially invest $500 million by purchasing MBIA shares at $31 each, a move that helped restore some investor confidence and had pushed MBIA shares as high as $37.50 the day the deal was announced.

The agreement between Warburg and MBIA does not have a "material adverse change" clause, or MAC, sources close to the deal said, meaning Warburg cannot cite that as a reason for backing out of the offer.

But with any acquisition, it's always possible to back out of a deal until it actually closes -- even a deal without a MAC clause. Cerberus Capital Management pulled its offer for equipment company United Rentals, citing liability limits in the merger agreement instead of a MAC clause. The two sides are battling in court over the deal.

New York-based Warburg may also be inclined to ride out the storm, as its strategy is broader than some other private equity shops.

Julie Johnson Staples, a Warburg spokeswoman, declined to comment.

MBIA's CDO exposure is the latest sign that ratings of bond insurers are in jeopardy of downgrades.

Triple-A ratings are a core part of the business model for the industry, and lower ratings may cause a ripple effect that forces more Wall Street banks to take billions of dollars of losses on the insured securities.

Rating agencies this year have slashed their ratings on billions of dollars worth of mortgage-linked securities as U.S. homeowners have defaulted on their payments.

(Editing by Leslie Adler, Leslie Gevirtz)

(Additional reporting by Michael Flaherty)