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It Must Have Been the Egg Nog

Written By Brian Hicks

Posted December 20, 2007


So what exactly were the fine folks at Warburg Pincus thinking just ten days ago when they came to the $1 billion rescue of MBIA Inc., the world’s largest bond insurer?

That’s the question they have to be asking themselves today after agreeing to buy $500 million dollars worth of MBIA stock for $31 a share.

That’s because with today’s shocking news that MBIA’s potential exposure to risky CDOs is considerably greater than its actual assets, the stock plunged over 20% to close at $20.00 a share.

That cliff dive helped to turn Warburg’s initial investment of $500 million dollars into about $323 million dollars in a mere seven sessions, which when you do the math works out to be a $17.7 million dollar loss everyday since their deal with MBIA was announced.

Nice job fellas. It must have been the egg nog.

From Bloomberg by Walden Siew entitled: MBIA says it has $30.6 bln exposure to CDOs

"MBIA Inc, the world’s largest bond insurer, said it has exposure to $30.6 billion in complex mortgage securities that it insures, an amount that eclipses its entire net worth.

MBIA’S stock plunged by 27 percent on Thursday, bringing its total decline for the year to more than 70 percent.

MBIA has exposure to $8.1 billion of collateralized debt obligations, or CDOs, including mostly risky debt known as CDO squared, or CDOs backed by other CDOs, it reported on its Web site late on Wednesday. The company’s net worth as of Sept. 30 was $6.5 billion.

"We are shocked that management withheld this information for as long as it did," Morgan Stanley said in a report, referring to the CDO-squared exposure.

"This new disclosure completely changes our view of MBIA being a ‘more conservative underwriter’ relative to Ambac," the second-largest bond insurer, said the Morgan Stanley report, which was co-written by analysts Ken Zerbe and Yoana Koleva.

MBIA’s CDO exposure is the latest sign that pristine top ratings of bond insurers are in jeopardy of downgrades by rating agencies."

Of course, it does make you wonder what else they may be hiding and why they were so desperate to play Warburg for the fool in the first place.

Cue the dominoes. It’s going to get ugly.