New MBIA Chief Brown Says He Has Different CDO Strategy Now

Feb.19, 2008 in Market Outlook

Last Update: 2/19/2008 4:46:54 PM

By Lavonne Kuykendall
Of DOW JONES NEWSWIRES

The return of Jay Brown to the helm of MBIA Inc. (MBI), the company he led from
1999 to 2004, suggests the company has decided that the best person to lead it
out of its trouble-plagued venture into complex structured finance deals is the
guy who got them into it in the first place.

Brown, whose ties with MBIA go back to 1986, took over as chairman and chief
executive of the company in early 1999 as MBIA struggled with the aftermath of
the bankruptcy of health-care operator Allegheny Health and Education Research
Foundation, which defaulted on bonds that were insured by MBIA.

One of Brown’s fixes for the company was to expand the company’s portfolio of
derivatives, or credit default protection it offered on collateralized debt
obligations. These CDOs packaged pools of loans, including subprime mortgages,
into complex securities.

Back in 2003, Brown told investors, “If you don’t like CDOs…you don’t like
MBIA,” according to a Financial Times article covering MBIA’s 2003 investor’s day
presentations. At that meeting, Brown said he expected “extraordinary” rates of
return on the company’s CDO portfolio, and expected the securities to make up
between 13% and 15% of the company’s book of business.

He doesn’t feel that way anymore.

“It has been clear as I have watched this industry from the outside over the last
six months that this business model is not well-built to handle the volatility of
those markets, and we will not do this business going forward,” Brown said in an
interview Tuesday, hours after replacing Gary Dunton as chairman and CEO of the
beleaguered bond insurer. “No more derivative CDOs. That’s for sure.”

CDO Business Grew Under Brown’s Watch

Brown noted in the interview that MBIA wrote coverage for structured finance
securities long before he came on board, though the business did grow while he
was in charge.

Brown gave up the CEO spot at the world’s largest bond insurer in 2004, and
resigned as chairman in May of 2007. It was during that time that MBIA increased
its CDO portfolio well beyond his original 15% upper target. By the end of last
year, MBIA’s CDO portfolio reached $130.6 billion, or 19.2% of its total insured
net coverage.

MBIA is now among the handful of so-called financial guarantors that are reeling
from their exposure to CDOs backed by subprime mortgages, amid an ongoing
deterioration in the U.S. housing market. MBIA faces the possibility it could
lose its coveted triple-A credit rating, which would hinder its ability to write
new business and also wreak further havoc on banks that have to write down the
value of securities insured by MBIA.

MBIA posted a fourth-quarter loss of $2.3 billion as write-downs in its credit
derivatives portfolio swelled to $3.5 billion. Scrambling to maintain sufficient
capital to justify its top-tier rating, MBIA in recent weeks has raised more than
$3 billion though debt and equity offerings and by slashing its dividend.

Sean Egan, principal of ratings agency Egan-Jones, called it ironic that MBIA
would turn to Brown to help the company recover. “It is hard to reconcile that he
was pushing for the company increasing its exposure to structured finance, and
now the company is reeling because of that very exposure,” Egan said Tuesday.

An analyst at Fitch Ratings said in an interview that it was inaccurate to put
blame on Brown for being part of an industry-wide movement towards privately
issued securities at a time when municipal finance was becoming less profitable.

“If you want to relate it to anything, it was that the structured finance markets
have been growing at a significant rate since the mid- to late-1990s,” said Fitch
analyst Tom Abruzzo. MBIA “clearly grew along with the market.”

The first nine months of 1999 marked the first time that bond insurers as a group
wrote more coverage for asset- and mortgage-backed securities and CDOs than they
did in the municipal market, according to a Fitch report at the time.

Weighing Options

Brown said he is at work with insurance regulators and others to craft a fix for
the problem that could see MBIA operating its municipal, private bond, and
investment businesses “separately,” though he drew the line at a split of the
company.

Ambac Financial Group (ABK), the second-largest bond insurer, is reportedly
considering a plan to separate its municipal-bond business from the riskier
structured finance operations. Another rival, Financial Guaranty Insurance Co.,
or FGIC, announced Friday it had applied to split its businesses, after having
its credit rating slashed by Moody’s Investors Service.

MBIA’s relatively strong capital position gives it more options than those
companies, Brown said, noting that “significant change” is required in the
securities MBIA insures in the future and the amount it decides to guarantee.

In recent days, the company has been examining its current structure, which
already consists of “many legal entities” that operate separate parts of the
business, Brown said in the interview.

“There is a lot going on behind the scenes,” Brown said in the interview. “We are
looking at all of those. Is there something in there for us to help our
customers? And we are evaluating those options as we speak.

“I know where I will be in five years,” he said. The question is, “How long will
it take us to get there?”

Shares of MBIA shed 54 cents, or 4.4%, at $11.70.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141;
lavonne.kuykendall@dowjones.com

(END) Dow Jones Newswires

February 19, 2008 16:46 ET (21:46 GMT)

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