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.

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