NEW YORK — Confidence in top bond insurer MBIA Inc. plummeted Thursday after the guarantor disclosed on its Web site that it had $8.1 billion in exposure to complex and risky securities backed by home loans.
The insurer said these collateralized-debt obligations are backed by high-grade debt, with 85% of the collateral from other CDOs.
Financial markets sent the company's stock lower and the cost of protecting MBIA debt soaring, with a Morgan Stanley research note on the disclosure fueling concerns that the bond insurer's troubles are deeper than originally thought.
Morgan Stanley analysts led by Ken A. Zerbe, who is known for his bearishness on the bond insurers, said that MBIA's $8.1 billion of exposure to these securities, called CDO-squared transactions, is "massive."
MBIA shares Thursday sunk to as low as $18.84, which represented the lowest mark for MBIA stock since January 1995. In afternoon trade, the stock was off 24% at $20.46.
The exposure showed that MBIA had "not as conservative underwriting as the Street and the market were led to believe," said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management.
MBIA and its rival Ambac Financial Group insure more than $1 trillion of securities. Their exposure to subprime-related investments and other risky securities has cultivated doubts on whether their capital cushions are sufficient to absorb potential losses and retain their top triple-A rated status.
If they lose their top ratings, it would ignite a repricing of all the bonds they insure and raise questions over the future of the industry itself.
That possibility has led these once-overlooked companies to cause a storm in financial markets in recent months, with their stocks and credit default swaps — derivatives that measure the cost of protecting the company's debt — swinging violently. Analysts and investors have expressed frustration at not being able to gauge how much exposure these insurers have to subprime mortgages that have gone bad.
Zerbe at Morgan Stanley said the MBIA exposure to CDO-squareds hadn't been released before.
"We are shocked that management withheld this information for as long as it did," he said.
The company didn't return a call for comment Thursday morning.
Moody's Investors Service and S&P, which both affirmed MBIA's triple-A rating with a negative outlook, said Thursday their decisions incorporated MBIA's $8.1 billion CDO-squared exposure, as well as the $30 billion in total CDO exposure.
MBIA said on its Web site that it "supplemented the listing of its exposure to CDOs that include RMBS (residential mortgage-backed securities) as of Sept. 30, 2007, to make it consistent with the CDOs that were included in Standard & Poor's analysis."
On Wednesday, when S&P's report on MBIA and other bond insurers was released, the credit and stock markets had a more muted reaction. Credit defaults swaps, which also serve as a barometer of investor confidence, widened only slightly and share prices dipped.
Moody's Investors Service last Friday also affirmed MBIA's rating with a negative outlook, while giving Ambac's triple-A rating a stable outlook. That had puzzled several analysts at the time.
"We had originally questioned how Moody's and S&P could have taken a more negative view of MBIA than Ambac," Morgan Stanley's Zerbe said. "Now we know — MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors: $8.1B of CDO-squareds."
TJ Martha, strategist at RBC Capital Markets, said Thursday that until now, Ambac and ACA Financial Guaranty Corp, which was cut by S&P from single-A to triple-C Wednesday, were considered the market's biggest worries.
"The notion of the CDO squared just spooked everybody this morning," he said.
Of the slew of analysts' reports, Morgan Stanley's was the most negative. Ambac last month criticized a Morgan Stanley report on its firm as not accurately reflecting the situation faced by the insurer.
JP Morgan analysts Thursday targeted the ratings agencies in their note. The S&P and Moody's reviews raise more questions and have "doled out slaps on the wrists," they said.
"We feel S&P and Moody's are merely sweeping the potential for significant future losses under the rug, hoping for the best and discounting the worst," they wrote.
The credit default swaps for the MBIA triple-A rated insurance unit widened by 40 basis points to between 285 and 305 basis points, according to a market participant.
That means the annual cost of protecting a notional $10 million of its bonds against default for five years is now between $285,000 versus $305,000 earlier.
Based on the previous day's credit default swaps levels, MBIA is being treated by derivatives investors as a B1, or solidly junk, company, according to Moody's Implied Ratings service.
The credit default swaps of MBIA and Ambac have seen volatility since July, hitting their highest levels in November, according to data provided by Markit Group.
