Toomre Capital Markets LLC

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MBIA Reinsurance Accounting Story Continues to Evolve

The MBIA Reinsurance accounting story continues to evolve. This morning the Wall Street Journal is reporting that bond insurer MBIA may face a civil complaint from federal and state regulators over its accounting practices for the 1988 reinsurance transaction that "hid" some $170 million dollars in losses attributable to the Allegheny health care system default. This complaint is likely to be filed in the coming weeks, The Wall Street Journal reported, citing people familiar with the matter and may be settled simultaneously.

As has been discussed previously at this site, such a complaint is quite serious news. Most market participants do not realize just how devestating a major loss by a bond insurer would have been amidst the 1988 Asian bond market crisis. By "hiding" its losses through retroactive reinsurance, MBIA escaped much of the scrutiny that would have come with questions about the adequacy of its capital base and its first ever significant payout on an insured municipal bond transaction. It will be truly interesting to see how serious the regulatory authorities treat this matter now some seven years later.