Tuesday, June 24, 2008

A piece of a company can go bankrupt - Mish on MBIA

I really like Mish's blog - but today he makes an assertion that is plain wrong. MBIA has held $900 million in the parent company rather than downstreaming it to the insurance subsidiary.

This has caused much consternation amongst regulators and rating agencies. But is - in my opinion - in the interest of MBIA shareholders. It clearly reduces the strength of the operating subsidiary but increases the strength of the holding company. Mish disagrees:
The statement by Moody's that the parent company is stronger because it is not funding its insurance unit is ridiculous. A piece of a company cannot go bankrupt.
Mish is obviously not an insurance regulatory guy. Pieces of companies go bankrupt in this space all the time. For instance:
  • Conseco holding company went bankrupt - but its insurance subsidiaries continued operating without any bankruptcy filing.
  • A long while ago Baldwin United went bankrupt - but its subsidiary (Ambac would you believe) maintained its AAA rating
  • More recently Fremont General had two businesses - an insurance business and a dodgy lender. The insurance subsidiary went bankrupt - but it took several years for the dodgy lender to catch up with them.
If anyone has done a decent analysis of the holding company and non-holding company obligations of MBIA I am really interested. Like begging. (I have an email...)

Its a very painful task to do it - and somehow I doubt Moodys have done it properly either. But Mish just dismisses this as a necessary part of the analysis - and in that Mish is wrong.

No comments:

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.