MBIA Bond Risk Soars on CDO Disclosure

A market bombshell from MBIA this morning is shaking up the mortgage finance market — the world’s largest financial guarantor said in a disclosure made available on its Web site late Wednesday that it has $30.6 billion in exposure to the collateralized debt obligation (CDO) market.

$8.1 billion of that total exposure is to more complex securities, a jaw-dropping 85 percent of which are CDOs squared — think CDOs of CDOs.

Bloomberg reported that credit default swaps tied to bonds insured by MBIA soared to nearly 600 basis points, as a result — the widest on record, according to CMA Datavision in London.

From Reuters, Morgan Stanley is feigning surprise pretty well:

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

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

Standard & Poor’s, according to Reuters, already had accounted for the data in issuing its ratings update earlier in the week — I’d assume the same is true for both Moody’s and Fitch. Nonetheless, MBIA’s stock dropped more than 15 percent in pre-market trading, and fell as much as 28 percent in active trading on the NYSE.

For those who aren’t familiar with CDOs squared, it’s time to read up: this Nomura piece from 2005 remains the best I’ve seen.