NEW YORK - MBIA a municipal bond and mortgage backed security insurer reported a large loss due to an accounting irregularity that makes little sense. The company re-evaluated its net insured derivative liability to $5.9 billion. This $5.9 billion would be assumed to be an amount MBIA would be expected to owe based on the fair value of the claims they may have to pay.
However an accounting irregularity allows MBIA to re-measure this amount to a warped fair value amount which includes the company's own nonperformance risk. The company says there derivative liability would be $5.8 billion higher if nonperformance risk was excluded from the calculation.
As MBIA looks weaker it has a lesser chance of paying out some of the money and as they look stronger this chance heightens but shareholders receive no value for this change in MBIA's perception. Essentially if MBIA were to go bankrupt they would be limited in the amount of claims they would pay but shareholders would get little value.
Essentially this accounting policy is akin to a company owing $1000 in bank debt and telling its shareholders they can only pay $600, so the company goes bankrupt and pays $600. If they became stronger they would survive as a company and pay all $1000 but the liability according to MBIA should be at $600 instead of $1000.
This accounting policy violates the first fundamental concept of accounting that a company will be in business for the foreseeable future. By having a liability estimated on a company's own bankruptcy chance is idiotic. We recommend an accounting change here to this warped fair value figure.
The real liability for MBIA after tax is around $12 billion meaning the company has a book value of around $-4 billion.
Take it away MBIA "Nonperformance risk is a fair value concept and does not contradict MBIA Corp.’s internal view, based on fundamental credit analysis of MBIA Corp.’s economic condition, that MBIA Corp. will be able to pay all claims when due."
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