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By Alistair Barr

MBIA Inc. (MBI) raised $1.1 billion selling new shares in February and was
planning to funnel $900 million of the cash into its main bond insurance
subsidiary by next week to salvage its crucial triple-A ratings.

But on Wednesday, Moody’s Investors Service warned it may downgrade MBIA’s
ratings anyway, so the company has decided to keep the $900 million at its
holding company instead.

Now analysts, investors and regulators are wondering what MBIA plans to do with
that money.

MBIA Chief Executive Jay Brown said during a conference call on Wednesday that
using the $900 million to set up a new insurance business is an option that the
company’s board of directors will have to consider.

Kevin Brown, a director at MBIA , said that strategy is just one of several
options MBIA’s board will be considering.

However, regulators, including the New York State Insurance Department, may not
approve.

“We are in active discussions with MBIA regarding the company’s fulfilling its
existing publicly announced commitment by the stated June 11 deadline,” Eric
Dinallo, New York State Insurance Superintendent, said in a statement.

Dinallo was referring to MBIA’s plans to send the $900 million to its bond
insurance unit by June 11.

Insurance regulators try to make sure that policyholder claims are paid. They’re
less interested in helping public insurance companies generate future returns for
shareholders.

That means the New York State Insurance Department may require at least some of
MBIA’s $900 million to be sent to its current bond insurance business to help it
pay big claims on guarantees it sold on mortgage-related securities that are
going sour.

“While it appears that MBIA now intends to use the capital to fund a new
insurance subsidiary, we would be surprised if the New York Insurance Department
would approve such an application unless MBIA met all of its commitments to the
existing subsidiary,” Joshua Rosner, managing director at research firm Graham
Fisher & Co., wrote in a note to clients on Wednesday.

That would include reassuring the regulator that there was enough capital at the
current bond insurance subsidiary to meet all obligations to existing
policyholders, he added.

MBIA’s Brown said on Wednesday that the company had planned to send the $900
million to its bond insurance unit if that extra cash would have supported its
triple-A ratings.

“This cash was never needed to pay claims,” he stressed in a statement.

However, Rosner noted that MBIA told a slightly different story in an 8-K
regulatory filing on May 12 with the Securities and Exchange Commission.

In the filing, the company said that, after consulting with the New York State
Insurance Department, it decided to funnel the $900 million to its insurance
subsidiaries to support “existing and future policyholders” as well as its
triple-A rating.

“Nowhere in the May 12th 8-K is the support of the Triple-A stated as the sole
reason they agreed to downstream the money,” Rosner wrote. “In fact, they agreed
to do so in support of ‘existing and future policyholders.’”

If MBIA has written any new business since May 12, policyholders would want there
to be enough capital in the company’s insurance subsidiary to pay any claims and
the state insurance regulator is responsible for making sure this happens, Rosner
added.

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