Up until this morning, it had been a long time since we last heard from “monoline” bond insurer MBIA. The company has been moribund since investors discovered it faced huge losses in the CDS market, like so many other firms which strayed into more lucrative areas.
Following its announcement that it planned to split into two companies, a true monoline-monoline, just insuring municipal debt (the good side) and a unit that will operate in the structure finance area. We briefly caught up with CEO Jay Brown. The following are some highlights.
What are the benefits of the split? “For those millions of people who hold Muni bonds, there’s a clear understanding that there’s resources to support those bonds… they will be able to clearly see that the existing bonds that they hold are protected.”
As for shareholders, it’s all about opacity: “From a shareholders side, the company owns two distinct companies that are legally separated.. I can stand up forever and tell them what I think” (Basically, Brown is convinced that there’s still a valuable, viable business here, but that nobody will believe him until they can see it more clearly on the books).
Are munis really credit-worthy: “We’re heading into one of the periodic tought times where budgets are
going to be in a lot of pressure. We’ve gone through this 4 or 5 times in their tough future. They’re going to react very aggressively because they can’t print money.”
The structured side: Brown says the traditional areas of structured credit, loan and auto finance, credit cards will need access to credit protection. One area they won’t be participating: the credit default market.
Perhaps the most interesting thing Brown told us is that the company plans to lobby the government to establish some kind of new liquidity scheme to improve the muni debt market. He notes that they’ve done this in the commercial paper market — arguably to decent effect, since that market has revived somewhat without more government support — but that they haven’t introduced any liquidity program for public debt. Obviously, we can imagine why MBIA might have an interesting in this.