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MBI MBIA bond risk soars on $8.1 billion CDO disclosure - Bloomberg.com (21.49 -5.53)

Bloomberg.com reports the co's shares plunged, and the risk of default soared after the world's biggest bond insurer revealed that it guarantees $8.1 bln of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages. Credit-default swaps tied to MBIA's bonds climbed 115 basis points to 595 basis points, the widest on record, according to CMA Datavision in London.

MBIA posted a document on its Web site late yesterday showing it insured the so-called CDOs-squared, a potentially riskier form of security than what the co typically guarantees. Rising defaults on subprime mortgages packaged into securities have led to bond downgrades and threatened MBIA's AAA guaranty rating. Credit-default swaps tied to MBIA's bond insurer, MBIA Insurance, climbed the most in at least a year. The five-year contracts, used to speculate on the company's ability to repay its debt or hedge against the risk it doesn't, rose 95 basis points to 340 basis points, CMA prices show. That means it would cost $340,000 a year to protect $10 million in MBIA Insurance bonds from default for five years. Contracts tied to Ambac rose 30 basis points to 595 basis points, according to CMA.

"We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. "MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.'' "How is confidence expected to return to the capital markets when these types of surprises continue to pop up?'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management"... MBIA's disclosure explains why S&P and Moody's Investors Service turned more negative on the industry in recent weeks, Zerbe said. Last month, Moody's said MBIA was "unlikely'' to fall below its target capital level for an AAA bond insurer despite downgrades of securities backed by subprime mortgages. Ambac had been flagged as "moderately'' likely to need more capital. "This disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac,'' Zerbe wrote.