April 6, 2005
Ét Tu, MBIA?
The widening investigation of the use of reinsurance to manipulate the balance sheets of insurers is starting to envelop MBIA Inc., one of the largest insurers of municipal bonds. MBIA disclosed last week that it received a demand for additional documents pursuant to subpoenas issued late last year by the SEC and N.Y. Attorney General Eliot Spitzer. A company press release (here) discloses that the regulators "seek documents relating to the Company's accounting treatment of advisory fees; its methodology for determining loss reserves and case reserves; instances of purchase of credit default protection on itself; and documents relating to Channel Reinsurance Ltd., a reinsurance company of which MBIA is part owner. The requests cover the period January 1, 2000 to the present." Channel Re is a Bermuda reinsurance company, and while not a pure captive, MBIA's CFO did state that "[w]e have significant influence, but we do not control them." A Wall Street Journal article (here) discusses the focus of the investigators on whether MBIA had a secret agreement to protect Channel Re from losses on the insurance contract, which would mean that the transaction was a loan and any liabilities would have to remain on MBIA's books. MBIA denies that there was such a secret agreement, but investigators are unlikely to accept any such denial at face value these days, and the investigation will likely continue for quite a while. (ph)
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