MBIA rally continues as CEO Brown testifies against RMBS sponsors

The rally in MBIA Inc credit default swaps has continued apace today, with the insurer’s chief executive Joseph “Jay” Brown testifying for the New York State Assembly Standing Committee on Insurance. MBIA five-year CDS reached a tight of 38 points offered up front – over two points tighter from yesterday’s close and around seven points tighter than where it began yesterday’s session. It was last quoted back at around 39.5, however.

The move has come amid speculation that MBIA may end up paying out less than previously thought on RMBS it has insured.

In his address, Brown condemned what he called the ‘pointless litigation’ of bank securitisation sponsors (including UBS and Bank of America) and other financial institutions to challenge MBIA’s ‘transformation’ into separate companies in February 2009, which was approved by the New York State Insurance Department. Brown also blasted the ‘fraud, misrepresentations and failures’ of sponsors to honour representations and warranties on RMBS insured by MBIA, leading – he said – to billions of dollars of claims.

Brown accused banks of wilfully ignoring underwriting guidelines and lending practices on a massive scale. As a result of these actions, he said, MBIA had paid out $4.2 billion in claims just in September – including $2.5 billion on Countrywide-sponsored transactions, $1.3 billion from what is now Ally Bank, $333 million on a Credit Suisse transaction and $76 million on one sponsored by Morgan Stanley.

Particular attention was drawn in Brown’s testimony to the ‘irony’ that most of MBIA’s losses have come from the ‘abysmal’ performance of securitisations that he claims were misrepresented to it as pools of prime loans, whereas the billions of dollars of subprime transactions it insured during the same period ‘have performed with virtually no losses’. He said that as much as 80% of the ‘prime’ loans in these pools insured were found, subsequently, to be ineligible for inclusion in the transactions.

Brown further disputed bank claims that insurers needed to show that a breach of these representations and warranties had actually caused a default. “That would be like saying that you can’t bring your car with faulty brakes back to the dealer until you actually crash,” he said. Instead, Brown said, it was appropriate to put the ineligible loan back to the sponsor, whether or not the risk from that loan has resulted in a loss.

Brown emphasised that MBIA has paid every claim on bonds it has insured – without relying on taxpayer-funded bailout money. By contrast, he said, most of the banks MBIA is litigating against received government assistance yet continue to deny their obligations. He alleged that sponsors had caused significant harm to MBIA and others in the industry, with the claims paid in connection with ineligible loans cited as a major factor in the decisions by ratings agencies to begin downgrading insurers in 2008. MBIA has since effectively ceased writing new policies, he claimed, and has been unable to provide insurance capacity to municipal issuers and investors. 

See also the response to this article from Sullivan & Cromwell in a comment below.