MBIA and S&P join war of words with Gotham over reinsurer’s AAA rating

Jay Brown, chairman of US monoline reinsurance company MBIA, entered into a row with Gotham Partners Management yesterday over comments made in a report issued by the US hedge fund. Brown called the report, which suggested MBIA should lose its coveted ‘AAA’ credit rating, a “negative advocacy piece” rather than “independent objective research”.

Gotham issued the 66-page report on Monday, which concluded: “We do not believe that MBIA deserves to be AAA rated.” The fund’s researchers said dramatically increased liquidity, investment, underwriting and correlation risks in MBIA’s business and investment portfolio in recent years were the reasons underpinning its belief that MBIA should not maintain its rating.

Brown hit back, stating that Gotham has shorted MBIA’s stock and has taken speculative positions in derivatives related to MBIA-insurer debt. “Gotham’s objective is to profit from its positions if its ‘research report’ results in a decline in MBIA’s stock price or a widening of spreads on these types of derivatives,” said Brown in a statement. Brown added that MBIA would “respond to any points that it determines merits a further response” and “take all actions necessary” to protect the interests of its shareholders, policyholders and constituents.

Gotham asserted in its report that MBIA faces a $5.5 billion to $7.7 billion mark-to-market loss on its collateralised debt portfolio (CDO), and called into question the company’s credit quality. It also raised other important issues such as MBIA’s accounting treatment of special purpose vehicles and transparency regarding the dollar value of problem credits in its portfolio.

But credit rating agency Standard & Poor’s (S&P) weighed into the debate late yesterday, stating that it had neared completion of rating reviews of MBIA Insurance, Ambac Assurance, Ace Guaranty, Financial Security Assurance and XL Capital Assurance that included the performance of their CDO portfolios. S&P said it had found “nothing thus far” that will impact any of the insurers' current ratings. S&P said it would publish its review of monoline reinsurer ratings next week.

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