Confidence Game - Christine Richard [67]
The statement appeared to rattle Dunton, who pushed his chair back from the table suddenly as if he’d been punched in the stomach.
“I don’t know that anyone knows what the level of exposure [is] here,” Poiset said.
MBIA’s predicament offers a cautionary tale about the risks of securitization. Securitization is all about transferring risk from the original lender to a group of bondholders. But the process is not seamless. Millions of dollars of loans have to be aggregated—typically via warehouse lines of credit—before there are enough loans to create asset-backed securities with a face value of $50 million or more. The size of a loan portfolio can dwarf the balance sheet of the loan originator. If the value of the assets falls far enough, the lender will often require the loan originator to make up the shortfall. This demand can open up a sinkhole in a company’s balance sheet as the company is suddenly forced to assume huge liabilities. These sinkholes would swallow scores of mortgage originators beginning in 2007 as the value of subprime mortgages collapsed and banks asked the companies to offset the loss in value.
As the meeting progressed, it was clear that the ground was beginning to give way beneath MBIA.
Dunton responded: “The whole issue is obviously to get as much off-balance-sheet, get as much senior warehouse paid down as possible. It’s obviously the key objective.”
The way to do that was by securitizing the liens: selling the tax liens to a special-purpose vehicle (SPV) and having the SPV sell debt to fund the purchase. An outside adviser joined the meeting and told the Capital Asset board members that several Wall Street firms had expressed interest in underwriting such a deal. The problem was they were all looking to MBIA to provide a guarantee on the bonds.
The MBIA executives balked. “Just so you understand, our franchise is not to take first losses,” Dunton explained. “That’s how we keep our triple-A rating. Our franchise is insured against Armageddon.”
“Zero losses,” Poiset said.
“Right, zero losses,” Weill said.
And it looked like this portfolio of tax liens contained some losses. The company had tried to sell some of its New Jersey tax liens, but the results had been disappointing. “I’ve got an analysis of it, but I understand that the pricing on it is ludicrous,” Gary Dunton told the group.
“Two cents on the dollar,” Heitmeyer interjected.
“No, I think it was 19 [cents on the dollar],” said Dunton. “I mean, it’s just not where it should be.”
MBIA needed to decrease its exposure to Capital Asset’s tax liens, Weill explained. It had no intention of getting in any deeper.
“We try to be a certain kind of company. And these kinds of situations stress all of that,” Weill said. “And the difficulty is that it’s very hard to be a triple-A company. Incredibly hard to keep a triple-A. Frankly, you found a way to stress us at levels that really stress us.”
The group agreed they would do whatever was necessary to arrange financing for the tax liens. There had to be a way to sell the bonds without MBIA insurance. For now, though, there were more immediate problems. A hurricane was barreling up the coast, and the MBIA executives had to get to the airport. “I love coming to town in a hurricane,” Weill joked. “Sometimes these things just blow over,” Dunton said, as the executives grabbed their briefcases and disappeared from the videotape.
In the summer of 1999, MBIA announced that it was getting out of the tax-lien business and sold a final bond issue. It was privately placed and never rated. Inside the company, the transaction was known as the “Caulis Negris” deal, and it caused MBIA’s Capital Asset problems to vanish from sight.
THE STORY WAS INTRIGUING because it opened another front on MBIA’s no-loss business model. It showed that MBIA’s problems in 1998 went beyond a bankrupt hospital. The Capital Asset fiasco also offered a revealing