MBIA Details Huge Mortgage Exposure, Shares Collapse

NEW YORK (Reuters) - MBIA Inc MBI.N, 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.

The announcement may scuttle MBIA’s $1 billion investment from buyout firm Warburg Pincus LLC [WP.UL], according to rating firm Egan-Jones Rating Co. 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. A spokeswoman for MBIA did not return a phone call.

MBIA’s CDO exposure is the latest sign that pristine top ratings of bond insurers are in jeopardy of downgrades by rating agencies.

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.

Fitch said on Thursday it also may cut MBIA’s ratings due to its exposure to the mortgage securities.

Insurer ACA Financial Guaranty Corp was cut to junk status by Standard & Poor’s on Wednesday. S&P also assigned negative outlooks to four other large insurers, including MBIA, indicating their top ratings were at a heightened risk of being cut.

S&P said on Thursday that MBIA’s CDO exposure was already reflected in its analysis.

Credit protection costs on MBIA through credit default swaps surged 100 basis points, an investor said. The cost of protecting MBIA’s debt rose to a record 600 basis points, or $600,000 a year for five years to protect $10 million of debt.

S&P also cut on Wednesday its outlook to negative on AmbacABK.N, XL Capital and Financial Guaranty Insurance.

For a factbox on major bond insurers, click [nN20113591].

(Editing by Leslie Adler)

Additional reporting by Michael Flaherty