Wednesday, February 16, 2011

Our Ally

We write a lot about MBIA here for several reasons, the main one being that they are the leader in recovery litigation. So, when the SEC document alert arrives from MBIA informing us of Jay Brown’s testimony, we pump up "Eye of the Tiger" and dive in. But the specifics we discuss apply to other guarantors.

First we found some very helpful, new information in the form of claims-paid information by sponsor:

“As a result of their actions, we have paid out over $4.2 billion in claims through September, including $2.5 billion on Countrywide-sponsored transactions, $1.3 billion on transactions sponsored by what is now Ally Bank, $333 million on a Credit Suisse-sponsored transaction, and $76 million on a Morgan Stanley-sponsored transaction.”

JP Morgan and Barclay’s are notably absent. This suggests that losses if any would be CDO form. We have previously noted that our perceived prevalence of CDO exposure in the case of JP Morgan contributed to the ease with which a commutation would be effected. This is because of the lack of recovery bookings on the part of MBIA and the long tenor of the counterparty exposure on the part of JP Morgan.

There is nothing really revolutionary in that. But we were surprised by Ally being so far up the list. Then we started thinking about another excerpt:

“All but one, which commendably recognized its obligation and amicably resolved the issue, have demanded that the parties engage in “loan-by-loan combat”.”

The first bank that comes to mind is JP Morgan and their higher reserves and recognition of liability, but that is far from a certainty. Why not Ally? Could be. Who knows? Its not so important.

What follows might be.

Thinking back to Ally’s settlement with the GSEs (our thoughts at the time are here), the reserves Ally had booked were higher than their outstanding put-back requests. Perhaps we should have surmised at the time that such could only be the case if a guarantor was pursuing legal remedies rather than actual put-back requests. We found Ally to have about $800M in reserves after settling with the GSEs. Wouldn’t you know that their 2010 YE reserves are $830M after the GSE settlements.

So far our speculation suggests that MBIA could be a big part of that. But the Devil is in the details and wouldn’t you know that there is a great footnote on page 96 of Ally’s Q3 2010 10Q:

“(a) A significant portion of monoline unresolved repurchase demands are with one counterparty.”

Now let’s pair that with what we know about MBIA’s booked recoveries. Importantly, MBIA has booked recoveries for $2.2B related to mortgage repurchases or roughly half of already paid claims. Just for some insight lets consider what Ally's recovery bookings would be at half: $650M. We think MBIA will get more, but its feasible that MBIA and Ally do not mismatch by an insurmountable margin.

Ally has publicly been trying to put the repurchase baby to bed. They have made significant progress as related in a February 2 presentation at a Morgan Stanley Conference:

“• Ally is addressing repurchase risk through settlements and established reserves
• Settlements
– Completed settlements with seven counterparties, including both Freddie Mac and Fannie Mae
– Settlements have been generally in line with established reserves”

Fannie, Freddie and five others have reached settlements. Based on MBIA’s significant losses and Ally’s significant monoline disclosure, lets say that MBIA has not settled, several others have, and this mortgage math might be summing up nicely. We are encouraged by what we perceive as MBIA not settling for too low a number. Even if both companies have booked a similar amount.

Ally is not a plaintiff in the Article 78 case. They also appear to be the front runner for first major RMBS settlement.

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