| NEW YORK
NEW YORK Bond insurer MBIA Inc (MBI.N) still faces problems, and it is hard to tell whether the company has enough assets to meet its obligations, hedge fund manager David Einhorn said on Tuesday.
Einhorn, the president of Greenlight Capital, questioned the big gains that MBIA has recorded from the declining value of its liabilities, as credit markets have grown more concerned about its ability to pay its obligations.
Whether or not that's allowed by accounting rules, it doesn't make sense from an economic perspective, Einhorn told the Reuters 2011 Investment Outlook Summit.
"To say your equity has value because your liabilities can't be satisfied is a questionable proposition," he said.
Chuck Chaplin, chief financial officer at MBIA, said the company is following accounting rules regarding gains on liabilities.
"I take his comment that it's confusing and maybe counterintuitive, but it is required," Chaplin told Reuters.
Einhorn declined to comment whether Greenlight Capital has bet that MBIA'S shares will drop by selling it short. Einhorn was among the investors that shorted MBIA for years before the financial crisis began, in part because he did not think the company was being forthright about its potential losses.
"I think MBIA has a lot of problems still," Einhorn said on Tuesday.
MBIA's shares peaked in early 2007 at more than $70, but later that year began a headlong descent as the U.S. mortgage crisis created huge potential losses for the company.
The insurer had guaranteed that complicated bonds linked to mortgages would not default, but as the subprime crisis widened, that proved to be a bad bet. MBIA's biggest rival, Ambac Financial Group Inc ABKFQ.PK ,also laid low by the mortgage crisis, filed for bankruptcy last month.
MBIA has soldiered on. Its shares trade at about $10, giving the company a market value of $2 billion. By the company's own accounts, it is worth about $2.5 billion, based on the value of its assets minus its liabilities.
A DIFFERENT STANDARD?
In addition to the gains it has recorded as its liabilities have fallen, MBIA has recorded more than $2 billion of assets from expected proceeds from legal action against banks that sold bad mortgages to bond investors. MBIA guaranteed those bonds against default, and now says it should not have to make good on those guarantees because it was duped.
Generally, companies can only record gains from lawsuits when the outcome of the litigation is both "probable" and "estimable."
But MBIA has historically refrained from taking losses on insured bonds because it claims the losses are neither probable nor estimable, Einhorn said.
"So I wonder if there is a different standard MBIA uses for probable and estimable on things that they've insured versus for recovering litigation," he said.
Einhorn said that because MBIA is not writing much new business, a key part of analyzing the company is determining whether its assets are sufficient to cover its obligations.
"It's hard to tell," he added.
MBIA's Chaplin said one of the company's main insurance units has equity by one standard of nearly $1 billion, and by the standards of insurance regulators, about $3 billion.
"It's not appropriate to say that it's hard to tell, because the number's printed on the page. But if someone says the GAAP accounting is very complex for this relatively simple business, I'd have to say, 'yes, it is,'" Chaplin said.
Said Einhorn, "I think MBIA's accounting is very hard to follow."
(Reporting by Dan Wilchins; Editing by Leslie Adler)