"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.
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: