MBIA Inc (MBI) 2007 Q4 法說會逐字稿

Good morning, and welcome to MBIA's conference call and webcast to discuss its fourth quarter and year 2007 earnings and other topics. During today's entire event all callers will be placed in a listen-only mode. After the Company's prepared remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Greg Diamond, director of Investor Relations for MBIA. Sir, you may begin.

Thank you very much, Melissa. Welcome to MBIA's webcast and conference call on our 2007 earnings and other topics. The presentation for this webcast titled 2007 fourth quarter earnings conference call presentation is available on MBIA's website as well as via the webcast website. We will be turning the pages for those of you participating via the webcast but we'll refer to page numbers so that everyone will be better able to follow along.

The information for the recorded replay of this event is available on MBIA's website in the fourth quarter earnings release that we distributed earlier today. As Melissa mentioned, the questions for today's event should be submitted in writing, and we will be accepting your questions during this broadcast. At this time we have already received well over two hundred questions in advance. I will provide more commentary about the question-and-answer segment when we get to that session.

However, I will make one final comment about it upfront. Our intention is to address as many questions as possible. We've compiled all of the questions and those questions where our prepared remarks and earnings release disclosures are responsive will not be used in the Q&A session. We've also consolidated alike questions into single questions; in other words we won't be responding to each of the 200 plus questions one at a time, but many or all of them will be addressed today. As such this will be a rather extended event.

Please sit back and enjoy. The MBIA team is assembled for today's event, and each are named on the cover of the presentation. They are Gary Dunton, Chairman, CEO and President; Chuck Chaplin, Vice Chairman and CFO; Cliff Corso, Chief Investment Officer; Mitch Sonkin, head of our Insured Portfolio Management. This same team will be responding to the questions later in the broadcast. I am not going to read our Safe Harbor disclosure statement, but I will ask you to do so, please. We will leave it up during Gary's opening remarks. With that commentary, please begin.

Thanks, Greg. Good morning, everyone. Thank you for joining us on the call. I want to begin by stating what you already painfully know, that these have been truly extraordinary times for MBIA and for the monoline industry. What started out in July as a modest tremor in the residential mortgage markets by November erupted into a full-blown seismic upheaval. And we spent November and December assessing the damage in our portfolio and taking aggressive steps to recover and rebuild in terms of our capital base.

Believe it or not I can't help but think of something the journalist, Edgar Watson Howe, once said, which was "a good scare is worth more to a man than good advice." I think all of us around the table here today would have to agree with him as a few of our underwriting decisions from the past couple of years have tested the Richter scale in a formerly unshakable world of the financial guaranty industry. And it now we are paying for these mistakes. All of the monolines are paying for their mistakes and I don't just mean economic terms. But also in terms of the wholesale challenge to the value proposition, credibility, even the integrity of our industry.

As CEO of MBIA, the leading monoline for over three decades, I can tell you that it is very difficult seeing the reputation of the company that you love come under fire. You have to remember that MBIA is a company full of fiercely loyal and dedicated employees who believe in their work, who can see its benefits in their communities and in the market and who have great pride in our franchise. They are a privilege to lead. We have a great history and great traditions. We were the first monoline to receive financial strength ratings of AAA.

Prior to this quarter we built shareholder value so successfully that we were one of only a handful of financial service companies in the S&P 500 that had 20 uninterrupted years of steadily increasing dividends since we went public in 1987. Over the years we've innovated many industry firsts from securitizing shipping containers, securitizing intellectual property. MBIA insured bonds, have built infrastructure and communities all around the world, saving taxpayers many billions of dollars in interest costs with our guarantee on their bonds.

The very first deal that we insured back in 1974 was an $8 million water and sewer bond for Carbondale, Illinois. That was a massive deal back in those days, and we were so proud. Well, a lot of [phobia] has passed through the pipes since then. But what has remained constant all these years is our AAA rating and our commitment to protect it. So when the residential mortgage market imploded, we moved quickly and aggressively to get back on sound footing. The decline in the market was so dramatic and sudden that essentially all of the market participants, the monolines, investment banks, commercial banks, the regulators, the rating agencies and the mortgage industry itself scrambled to keep up with rising default and loss expectations.

Even before the rating agencies provided their capital requirements we identified the problem credits in our portfolio. In some cases ahead of the markets. And we moved to improve our capital position by over $2 billion in five weeks. Our overall capital plan currently exceeds all stated rating agency requirements. Our anticipation of in response to the turn in the market has been singular among the monoline insurers, putting us in the best position to maintain our AAA ratings among the large public companies.

While we will have had some real losses, significant losses, there is nothing that we can identify that justifies the 80% drop in our stock price since last year. No serious analyst expects that we will have $7 billion of economic losses on our portfolio. So our own conclusion is that the market has overreacted to the real and obvious problems that we've had, as well as to the fear mongering and intentional distortions of facts about our business that have been pumped into the market by self-interested parties.

Pricing on our credit default swaps recently suggested a 70% risk of default within five years. We are scratching our heads over this because we have over $16 billion of claim paying resources, and the holding company has liquidity resources covering interest for more than five years. Exposures under scrutiny at the rating agencies drive about $3 billion in additional worst-case losses in their model. So even if you think the rating agencies are wrong, are they $3 billion worth of wrong?

The rating agencies have been just as stunned by the rapid turn in the housing market as all the other market participants. At this point the capital requirements should not be seen as static stakes in the ground. So far we don't disagree with the capital estimates they published on us. But at some point it is possible that they will post requirements that are uneconomic. Wherever they wind up, the market will enforce its own tiering on a field of bond insurers, rewarding those that manage their business conservatively and who are proactive in dealing with problems with profitable executions, [unwrapped] transactions.

What will that competitive field look like going forward? We've gotten a lot of questions about whether new entrants into our market will take so much share that the traditional bond insurers could lose their market positions. First, let me say that we believe new investments by smart players like Warburg Pincus and Warren Buffett speak volumes about the viability of our business model and our market. As for competition for market share, competition is healthy in any business, and we are confident that our origination and servicing infrastructure, our experience, our capital base and ratings position will keep us in a leading position. As market engines in the last few years have found, it takes years to become established and earn the highest ratings.

I don't know anyone who thinks that it will become easier to get AAA ratings in the future. Even in the established monolines a solid capital base and AAA ratings do not guarantee shareholder value as we've seen last year. My job is to deliver at least market returns to shareholders over time while maintaining the highest level of integrity and claim paying ability for our bondholders. We did not do very well on the form of this past year but we absolutely have not taken our eyes off the latter. The quick reaction we took to strengthen our capital has allowed us to meet or exceed all stated AAA requirements.

I want to spend a minute on our capital plan. As you know, we put together a comprehensive plan to raise over $2 billion. The plan consists of $1 billion investment commitment from Warburg Pincus, this commitment has two parts. The first part is a $500 million investment in MBIA common equity at $31 per share. The second part is a commitment to backstop a $500 million rights offering. And we are considering this and other steps to raise equity.

Other component parts of our capital planning include a $1 billion surplus notes offering, a net release of capital that is of course amortizing and maturing transactions, a dividend reduction and summary insurance. Yesterday I am very happy to report, that we closed on the first leg of the Warburg Pincus commitment, bringing $500 million of fresh equity capital onto the balance sheet. In Warburg we have an energetic and creative partner who will be a great asset for us going forward. We look forward to closing the second part before the end of the first quarter.

And we are thrilled to have David Coulter and Kewsong Lee, both from Warburg, join our Board. Their strategic advice and tactical experience have been invaluable and these few weeks of our partnership and we look forward to a long and prosperous relationship.

Our $1 billion debt offering closed successfully two weeks ago; while we did pay more for the surplus notes than we had hoped, we view it as a very cost-effective surplus in our insurance company with a net cost of about 5.5% after-tax, and of course investment income on the proceeds.

For the other steps we have taken, such as preserving capital, to its net release of amortizing and maturing transactions, our dividend cut and reinsurance, we have already seen the restoration of stable outlook on our rating from the first of the three rating agencies. That tells me we are on a positive path. What a trip it has been. Along the way we have learned some important lessons, and we are working to apply them just as aggressively as we implemented our capital plan. Lessons about underwriting and risk management. The need to be more assertive in countering misinformation about our business and to be more open and transparent to the market ourselves. We are committed to the highest standards of disclosure as we work to rebuild our credibility with issuers, fixed-income investors and shareholders.

I know that when the smoke clears on 2007 it would be a miracle if anyone remembers the year for anything other than the losses we reported. But there was much more to the year than just the fourth quarter. We established a new company in Mexico, the first AAA rated monoline and began writing some excellent business there. New business was robust, and we reached $1 trillion in net insured debt service. We had a number of very successful remediations on exposure, such as the Eurotunnel, Royal, Northwest and Delta Air Lines.

And internally we reorganized and streamlined our senior management team to better position ourselves for the exceptional business opportunities in this market environment. When I evaluate the quantitative and qualitative measures of our performance in 2007, against an extremely challenging environment, I conclude that it was a year where we persevered against unprecedented challenges and successfully defended and maintained our AAA rating. So just as I would ask you not to judge a year by the events of the fourth quarter, I would also ask you not to judge the company itself by these events. We are greater than the sum of our parts and our value should not be underestimated by market turbulence that we have carefully and deliberately structured our business to withstand. It has traditionally been true that our business grows and thrives in this turmoil and when there is uncertainty in the markets. After all, credit protection appears to be a better value when investors are worried that the sky is falling.

Disruptions in the market have reinforced the value of credit protection, and it is not just protection from losses. There are also a lot of investors out there with bonds that have not been downgraded thanks to bond insurance. Now the need for financing in the public finance and global infrastructure markets has never been stronger. Structured finance market will certainly undergo a period of reassessment, but it is unlikely that the banks will re-intermediate markets that they exited over twenty years ago.

The securitization of assets like credit card receivables, car rental fleets and others will most certainly continue. The technology may be different and probably much simpler, but continue it will. The general market conditions that we see today are generally favorable for the industry. In the last six months in certain US public finance deals premiums have increased by 60% or more. The current dislocations will likely result in a smaller and more pricing disciplined bond insurance industry in the future. The combination of these effects we believe will create over time, not right away, an opportunity to write business very selectively and achieve risk-adjusted pricing that is very attractive.

Before I close, I want to say a bit about where I think the industry is headed, especially in light of recent events. And again I am reminded of the words of another great philosopher, Yogi Berra when he said, "a guy ought to be very careful about making predictions, especially about the future." So I will take my chances here anyway and suggest a transformation of our industry is already underway.

The first phase was a sorting out of what exactly the exposures are for each company and a determination of what is required for each company to maintain its market position. The second phase is the execution of capital plans, a shift in the structure of the industry and the emergence of winners and losers. There will be a return to a more stable and consolidated marketplace as the last element. I can't say when the third phase will begin, but with our capital plan fully implemented MBIA stands firmly in the second phase, and we have every intention of retaining a leadership position in the third phase, as well. I am confident that MBIA's place in this future scenario is sound. We will need to manage through the difficult current environment but our brand value, our employees, our capital base, market position, capabilities, balance sheet and reservoir of future earnings give us a solid platform for future growth that few others enjoy.

And finally, I want to express my appreciation to the large number of shareholders who have reached out to me and others in our company over the past several weeks to share their support and confidence. These gestures have meant a great deal to all of us, and I can assure you that we will continue to do all that we can to merit the trust and confidence that you have placed in us. With that, I will turn the call over to our CFO, Chuck Chaplin. Chuck, you still awake?

Thank you, Gary. For this quarter we've included a lot of detail on the income statement in our press release. So I'm going to keep my remarks about the income statement relatively brief and get onto a number of other current topics. But first on production. In the insurance business while the fourth quarter production numbers look reasonable there is a story behind them. October was robust, and then as concerns over our exposures to the housing market grew with the rating agencies announcement that they would be rethinking capital requirement, production dropped in November and then dropped further in December along with issuance into the insured market.

Although we had some slippage in our marketshare we were still 22% of the domestic public insured market in December. Our quarterly production in domestic public finance was higher than last year, driven by continued success in the military housing sector. That said, the last two weeks of December were quite slow. Going over into the first three weeks of January 2008 we did wrap $700 million of bonds for $4 million in adjusted direct premium for ADP. This week we did two hospital deals that more than doubled that production. Even in this environment there continues to be demand for the MBIA wrap.

Our international public finance production was also down in the fourth quarter due to investors' concerns over the US mortgage market. Global structured finance business was off significantly also in the fourth quarter due to the dislocations in much of that sector, which continue today. Although we expect overall production to be low this year, we see a somewhat strong stronger pipeline internationally than we do here in the US.

Now turning to the income statement, I will make a few comments on the quarter as our release really focuses on the full-year results. The insurance revenues were level as scheduled premiums, scheduled premiums earned increased by 13%, the fourth quarter of sequential increases. The strong production of the last several quarters will help maintain the flow of our revenue as we head into a lower production period. For funding income was down 50% in the quarter, and investment income was basically level.

Our operating expenses were down 24% on a GAAP basis, and gross insurance expenses were down about 19%. About half of the decline in gross expenses is due to the adoption of our retirement plan last year that caused an acceleration of recognition of long-term compensation and about one-third was due to lower loss prevention expenses; in last year's fourth quarter we still had meaningful expenses related to Eurotunnel.

The big story in the insurance segment, of course, is the loss and LAE expense that we recorded. The total was $737 million, of which $23 million is formulaic. The balance or $714 million is due to our exposures in the prime second lien portfolio. $614 million of that is associated with case reserves on 14 deals with $7.6 billion of par, on which we are paying claims or expect to pay claims in the near-term. As of year end, we've paid out about $44 million in cash net of reinsurance on those cases. And we would expect the payments will extend over the next two or three years.

Mitch Sonkin is going to speak in a few minutes about the analysis that drives our estimates. But it's important to note at this point that the cash impact plays out over a longer period of time, a few years, and doesn't cause a material liquidity issue for the company. In addition to the cases, we recognize that the characteristics of the deals that we have not reserved are not materially different than those for which we have. They simply haven't exhibited the elevated delinquency of those first 14. Therefore, we are boosting our unallocated reserves to account for probable losses in the balance of the portfolio. So those losses produced a negative insurance income that you see here.

Our investment management segments income continues to grow. At year end we had assets under management which were even with 2006's fourth quarter, where we enjoyed somewhat wider spreads on asset liability positions that we entered in the third and fourth quarters. The corporate loss is static, but this year's results included an impairment of an alternative investment, which was about $3.5 million. At this point we have no third party managed -- no third party managed alternative assets. We do have a $25 million investment in a fixed income fund that MBIA Asset Management is starting.

Gains and losses include $24 million of unrealized gains, which contain two impairments totaling $20 million in the asset liability portfolio. It also includes a $270 million positive mark-to-market on total return swaps that we used for economic hedging purposes, also in the asset liability portfolio. The big story here, though, is our $3.4 billion mark-to-market on insured credit derivatives, and I will return to this subject in a few minutes.

Operating income excludes the impact of the mark-to-market. But includes the $200 million pretax impairment of three CDO squares which we regard as an operating item just like the loss reserves on the second lien portfolio. Mitch will also touch on the derivation of that $200 million loss.

Moving to the full year, the drivers and the key items are virtually the same. The first three quarters of 2007 were normal ones where after tax operating income totaled $601 million, and then the fourth quarter reduced the total to $193 million as a result of the case loss and impairment activity that I just referred to.

So our mark-to-market. The fourth quarter mark-to-market was $3.4 billion. Now I will get into the number in a minute. But I do want to go over some background which may serve to put the change in fair value of our contracts in proper context. We write credit protection on CDOs and CMBS pools in derivative form in credit default swaps. These credit default swaps have very different terms than the CDS that are trading between other capital markets' participants; terms which protect us from liquidity risk. We did not post collateral, and the instruments cannot be accelerated except at our option.

We have been criticized because our marks to market don't reference traded CDS. That is because our contracts don't trade, and the differences between financial guaranty type CDS and other tradable CDS are so great. The other question that we get is based on a comparison of our marks to market and those taken by companies with outright ownership of portfolios of CDO tranches. This comparison we believe is inappropriate, as well, since we don't know the makeup of the portfolios of CDO tranches our marks are being compared to. We should keep in mind that when a financial institution owns a AAA tranche and insures it with us, they retain a deductible amount, and the mark on that deductible will be much more volatile than the mark-to-market on a liquidity protected senior position.

And it is probably true that the swaps with MBIA on the books of those institutions largely offset their marks on our referenced interest. So the remaining marks that they report almost must be on trades other than those hedged with MBIA. So it shouldn't come as any surprise that there is not much of a relationship between our marks and theirs; we are marking fundamentally different positions.

Since there aren't good market observations for our exposures, we use a model to estimate the fair value of our positions. The model simulates what a bond insurer would charge to wrap the transactions that we are in today, based on the default risk of the underlying collateral. The default risk is estimated by referencing market spreads on the collateral. Our model then estimates an implied insurance premium and the present value of the difference between the implied premium and the actual premium is the fair value.

Our marks, as I've said, are driven by changes in market spreads. And here we see the cash spreads on CMBS and RMBS which rose dramatically in the fourth quarter. These are reasonable proxies for the spreads that cover most of our transactions that are subject to FAS 133. And this kind of a double whammy effect. Our model implies a nonlinear relationship between fair values and spreads on collateral. This shows the relationship for a sample CDO. As the spread on the collateral gets larger, the implied insurance premium and therefore the mark-to-market grows more than proportionally.

In the fourth quarter, spreads were already wide, so we are on the right-hand side of this graph, and then they got wider. So the impact on our mark was quite substantial. And you can see the quantification of that here. In the first column of numbers on the left, you can see that $2 billion roughly of the mark was due to spread widening.

In this quarter also, though, the rating agencies downgraded thousands of RMBS issues, including many which were collateral in our deals. The impact of the downgrades contribute nearly one-third of the mark-to-market or $1 billion. Because we haven't seen much in the way of actual losses in the portfolio, the impact of collateral erosion is still small. And of course for the first time -- and you can see this on the far right -- we have credit impairments that are embedded in the mark.

Please note that the impairments are estimated using the bottom-up process that Mitch Sonkin runs that relies on detailed analysis of the collateral and the deal structures. The marks-to-market are the result of more top-down analysis. Now the two should co-vary, and it does make sense that the sector that saw substantial credit migration is also where we saw some impairment.

The CMBS portfolio is one where we have seen dramatic spread widening, which doesn't appear to have much credit migration or erosion content, because credit fundamentals in that sector continue to be quite strong. Technicals affecting the trading in the CMBS indices may be driving the mark here.

Now moving to slide 10, I would like to drill down a bit on our capital plan. Gary already gave you the punchline, which is that we intend to capitalize our business to withstand worst-case potential experience to ensure that MBIA remains a strong and stable franchise for the long haul.

Let me review a bit of ancient history. At midyear 2007, we and the market began to have some concern about subprime mortgages as analysts began to forecast 8% to 10% cumulative losses on some subprime securitizations. At those cum loss levels, there would not have been much impact on our subprime exposures, either direct or in CDOs. But the deterioration in the mortgage market generally began to affect our prime second-lien portfolio.

Due to the uncertainty, we switched at that point to a capital conservation strategy, shutting down our share buyback activity. As the fall wore on and estimates of subprime losses were recalibrated into the 18% to 20% zone, this called into question not just lower rated RMBS, but also high-grade subprime collateral in our CDOs.

We recognized in November that we had the possibility of requiring additional capital to maintain our AAA rating income and commenced the process of building our capital enhancement plan. By the time the rating agencies gave us their feedback in mid-December, we had already raised $1 billion and had a plan in place that would ultimately raise an additional $1 billion.

So let's pick up the story from there on the next slide. Here's the current state of play with the rating agencies. In December, Moody's affirmed our AAA with a negative outlook, only to move us to a review for downgrade status four weeks later. This action caught us a bit by surprise, but we still anticipate that the result of our capital plan will be that we meet or exceed Moody's requirements and that the rating will be returned to AAA stable.

Moody's indicated that they will undertake an industry level review, focusing on the long-term demand for bond insurance. We believe that there is ample evidence of demand for our product and that that demand is more likely to grow than shrink in the future. We don't believe that bond insurance will go the way of the buggy whip, but the industry does have some work to do to rebuild its credibility, including recapitalizing and getting to a stable ratings outlook.

S&P has confirmed that our capital plan more than meets their targets for AAA rating and that they will keep the companies that are exposed to the housing market on negative outlook status until S&P believes that the coast is clear with respect to the mortgage market. Their press release of two weeks ago showed that actual subprime losses through December were somewhat less severe than their model would have predicted. But, they said, that the expectation of a prolonged period of house price depreciation generates a higher expected cumulative loss. Even after that adjustment want to their model, MBIA has more than enough capital to meet their standards.

S&P announced yesterday that they would downgrade 8000, 2006 subprime RMBS securitizations and CDO tranches. While we have not been able to assess the total impact of this as of yet, it appears that S&P is reflecting in security ratings the changes in outlook on the subprime market that they articulated in their January 15th release, and that they've already tested against the monoline companies. Fitch affirmed our AAA rating with a stable outlook two weeks ago upon the successful completion of our surplus notes offering, as Gary had said.

Moving on, on the left side of the next chart we are comparing the expected cash losses that we have recognized or will recognize in our financial reports of year end with the unexpected or stress case losses that the agencies are requiring that we capitalize to. Our expected losses stem from a bottom up analysis of each credit in the portfolio, while rating agency analyses are necessarily more top down and are attempt to estimate worst-case losses. While each agency approached this challenge somewhat differently, the range of impacts on capital among them is relatively tight. We did have, and we show this on the right a capital shortfall that ranges from $1.75 billion to $2 billion. That is including all the updates to capital requirements that have been reported out to us by the agencies thus far, and that is shown here.

The elements of our capital plan at this point have been well-publicized. I should add that given both the volume and mix of new business so far in the first quarter 2008 I would expect another hefty addition to capital in the quarter even if we take no additional action. Let me give you a couple of updates. We raised $500 million in equity yesterday, and we have Warburg Pincus commitment to backstop an additional $500 million. Although we originally conceived this as a rights offering, we also considered or we are also considering alternatives which preserve the idea of a backstopped equity offering. Unfortunately, I cannot go beyond that at this time.

We are in the process of finalizing the estimate of capital formation from operations in Q4, and we are negotiating reinsurance agreements. While these numbers, the value, the roll off in reinsurance benefits may move around a bit, we are confident that together they will have at least this much impact on our capitalization. Obviously we don't know where the housing market will go. We are pretty deep in unchartered terrain today, and we are also uncertain about how the rating agencies will sort things out. But our course of action is certain. We're going to work to capitalize the company to the point where there are no questions in the market from serious analysts, investors or customers about our capital position or our intent.

Here we show our capital position relative to requirements on a pro forma year-end 2007 basis. We will have an estimated excess over rating agency stated requirements of $750 million to $1 billion including the fourth quarter statutory earnings. By the end of the first quarter that excess will likely be another $200 million or so higher. While it is possible that we will have additional capital requirement due to downgrade of reinsurers or financial guarantors, rating agency recalibrations of models and the like, we believe that they are manageable in the context of this very strong position.

Now moving on to another topic, now that our entire sector is experiencing some stress, we are receiving more investor calls and questions about our exposure to the other monolines and the financial guaranty reinsurers. And we think that some of the concerns that we that, that have been addressed to us have been somewhat out of proportion. So let me provide some context and some facts behind this.

We have two types of exposure in the insurance portfolio, reinsurance counterparty risk and a small amount of exposure through guarantees on top of other monolines' insurance policies. On the left we show that we have ceded roughly $84 billion of par to our reinsurers. Channel Re is the largest participant with about $43 billion. RAM Re and Assured are the next largest at $11 billion and $9 billion, respectively. And the others are much more minor. The total amount of capital credit that we get for our reinsurance ranges from $1 billion to nearly $2 billion depending on which rating agency model you're looking at. On the wraps over on the right here, our exposure is small, and the capital impact is trivial because of the duel default probability associated with the underlying exposure.

I'd like to spend a few minutes on Channel Re. It is obviously a special case. MBIA is a 17.4% owner of Channel Re. So from an accounting and disclosure standpoint it is a related party. But don't take that to mean that we control Channel in some way or that it is a captive reinsurer. The 83% owners are PartnerRe, RenaissanceRe and Koch Industries. And they are not in this business to be taken advantage of by MBIA. Channel is an attractive investment for them. The returns on which benefit from the Bermuda tax advantage. It has a full staff and makes its own underwriting decisions on facultative sessions, which is most of the business that we send them.

There are absolutely deals that we wished to cede to Channel that they've turned down. Usually for capacity constraint reasons, but sometimes also because of underwriting differences of opinion. While Channel's portfolio does have more structured finance exposure than MBIA's, it has much less of the second lien RMBS that we have taken large provisions on. Bottom line, Channel is an independent reinsurer that we haven't you have an investment in. Because it does have CDO exposure, the rating agencies will at some point complete a review of Channel just as they have for MBIA, and Channel may have a need for additional capital just as we did. The owners of Channel are strong, well capitalized companies who are fully capable of adding capital to the business to maintain its AAA rating. But obviously from a risk respective we need to consider the impact of a downgrade. The capital credit that we get for Channel is about $700 million to $1 billion depending again on which rating agency model you're looking at. That credit is backed up by nearly $500 million in cash collateral in two trusts.

We think that we are very well protected. In the event, however, of a downgrade to AA we think the worst-case capital impact to us is 100 to $200 million but the cash collateral may mitigate that. Ultimately we could take back the exposure or leave the coverage in place and increase the ceding commission. We have identified an error that is in our press release of last night. We said that Channel Re was on review for downgrade with both S&P and Moody's and that is incorrect. Channel is only under review with Moody's.

Another event that took place at Channel Re is that we have ceded it transactions that are subject to FAS 133. In the fourth quarter as MBIA heads its own $3.4 billion mark-to-market loss a portion of which is ceded to Channel, which brings Channel's book equity below zero. The investors who picked up the earnings of Channel under the equity method including MBIA will effectively adjust the carrying value of their investments to zero. Just as with the primary companies, though, this is a non-cash charge that we expect to reverse over time except for any present or future credit impairment. We do not regard Channel Re as permanently impaired. We are still expecting solid returns on our investment in this company over the long haul.

We also have a $37.6 billion portfolio proprietary fixed income asset in the insurance and asset liability management portfolios. As a major pool of fixed income capital it makes sense that we would own some wrapped bonds as insured paper is a significant part of the high-grade fixed income market. When we buy wrapped paper for investment we do an analysis of the underlying assets for credit and quality so they end up being high-quality underlyings. The average ratings of the portfolios, excluding the impact of all wraps, dropped one or two notches in insurance and asset liability, respectively but remain within the AA range.

Now 6 to 7% of the portfolios insured by MBIA. It has been suggested that the rating agencies should charge capital for the underlying rating in the investment portfolios. The fact is we are already being charged capital for that underlying in the insurance company. In the event that that underlying were to default, the insurer would pay on the policy and all bondholders, including MBIA itself, would benefit. There is no way that we can lose twice from a single default. So it doesn't make any sense to consider doubling up on the capital charge.

Next topic, holding company activity. Lately we've talked to a lot of people about our holding company, and as a result some analysts are suggesting that we have substantial liquidity risk. It has even been suggested that we might be unable to service interest on the holding company's debt as early as well, as early as tomorrow. Nothing could be further from the truth. MBIA does not take material liquidity risk in any area of its business and we will walk you through the issues affecting the holding company and the asset management activities. But just one minute on the insurance company itself. We periodically perform a stochastic test of one year liquidity comparing stress liquid assets to 1 in 10,000 event claims experience. And generally the ratio ranges over 5 to 1. We also look at the one week with the three largest debt service payments on wrapped bond, assuming that is the three large transactions default at the same time. This ratio also shows a typically 5 to 1 type ratio.

Today we have a live stress case. We now expect to pay out $814 million in cash claims on our RMBS and our CDO squares. In the near-term we expect to pay out the $614 million that we have reserved on the RMBS over the next 24 to 36 months. These net outflows will be easily handled by our cash flow from operations, which aside from losses, runs to $900 million to $1 billion per year.

Now the holding company, MBIA Inc. engages in two main activities. First there are your typical corporate level activities of making investments in subs, accessing the capital markets for debt and equity, covering the cost of the Board of Directors and other public company type costs. Then we have our asset management activities, the majority of which is the asset liability business where we issue liabilities guaranteed by MBIA Corporation and then purchase high-grade fixed income instruments that enjoy the spread income. To get a clearer picture of our liquidity profile it is important to look at these two activities separately. So I will talk for a couple of minute about holding company activities and then bring it over to Cliff Corso to review our asset liability management business.

The bottom line is that our holding company assets and our bank lines provide a substantial coverage of actual expenses at MBIA Inc. in the holding company activity. We go into that in a little more detail on the next page. In our holding company activities we have a 12-31-07 cash balance of $434 million. Of course we also have a revolving line of credit at the holding company, which I will come back to. The maximum regular cash flows that the holding company could expect in a year include the statutorily permitted insurance company dividend and the net income of the asset management business if it were to stop growing the ALM business. That totals about $639 million. I don't expect that we will bring that much in cash to the holding company this year. We expect to grow ALM activity and the insurer may dividend less than the maximum amount. And as you will see, we don't need it. The uses are about $117 million of interest and expenses. And then we have a discretionary charge, shareholder dividends. The $112 million shown here reflects the closing of the Warburg Pincus investment but not the rights offering. So actual annual costs will be more than $229 million here by the time we complete our capital plan. So let's just say that they are about $250 million.

The cash on the balance sheet, then, gives us almost two years worth of coverage. Maximum insurance company dividends add another two years of coverage. The bank's facility adds another two years of coverage. So that is six years in total. And of worse, we haven't considered changing the dividend rate, which we have shown that we will do to the extent that the company comes under stress. Bottom line is rumors that the holding company would be insolvent in the near-term, we believe, are without merit.

Just a word on our revolver. This facility has 11 bank participants and expires in 2011. When we began to contemplate a surplus note issue, we were able to get our banks to agree that the surplus note will be an equity item for the purpose of calculating the covenants. We've made disclosure of that fact. Even with the substantial losses that we had in the fourth quarter, we don't trip either of the covenants in the deal. So our revolver continues to be available to us in the ordinary course.

Now with that, I would like to turn the agenda over to our Chief Investment Officer, Cliff Corso.

Thanks, Chuck, and good morning to everybody. Today I'd like to cover three areas of interest regarding the asset management businesses. Principally as they relate to the balance sheet of MBIA. First I would like to review MBIA's insurance investment portfolio; I will follow that by commentary on our A/L product segment and finally I will wrap it up with some comments on our conduit segment. Together these three segments sit on the balance sheet of MBIA and comprise a significant component, roughly $41 billion of the overall footings of the company's consolidated balance sheet.

So let's start with slide 28, the MBIA investment insurance portfolio. The key takeaway on this slide is a solid, conservatively managed portfolio. It represents the capital account for MBIA and so it is here to back the insurance guarantees, sits at about $10.3 billion as of December 31, but it is now growing. It is growing primarily due to the proceeds from the surplus note issuance, as well as the capital investments that Chuck mentioned. A little bit about this portfolio with regard to the wraps, but I did think it appropriate to highlight a couple of the statistics here. It is a very high-quality, currently AA plus, AA1 rating. Chuck talked about the cut-through without the wraps. You can see it is still a mid AA portfolio even with affect to the wrap component of the portfolio. Additionally, we have diversified the portfolio greatly. It is very granular. On average the position sizes are less than 25 basis points or .25%, a little bit under $20 million for credit.

As a taxpayer, municipal bonds of course play a part within the portfolio. You can see that the municipal component is about 57% of the portfolio. What we are after basically what we are after here is the best after-tax return that we can get per unit of investment dollar. And I just say munis, by the way, as perhaps you're reading in the paper due to the volatility in the market have become incredibly attractive, and cheap by way of historic metrics. Munis are currently about 100% of treasuries. That represents a pretty good opportunity for us to deploy some of the proceeds that we've been talking about to that sector.

In terms of the sector allocation we've also been very conservative. You will note there is no CDO exposure, no securities below investment grade, less than 0.25% BBB. Indeed, 73% of that portfolio is rated AAA, which includes our cash and government securities. And 94% plus of this portfolio is rated AA or higher. There is no credit barbelling going on; it is a very high-quality portfolio. That is the bottom line.

The next segment I want to touch upon in the following slide is our A/L product segment, our asset liability business that Chuck referred to. This segment is also on balance sheet. We had approximately $27 billion in outstandings as of year end. This is structured much like other large insurance company ALM programs. Indeed, one of the strengths of the program is the liability funding strategy, which I will talk you through. We utilize a diverse funding platform, to purchase a high-quality fixed-income investment portfolio. And then we neutralize interest rate and currency risk through matching and hedging and earn the credit spread between the assets and liabilities. So as Chuck mentioned we are enjoying those spreads between the borrowing costs and the return on the assets.

It is not a trading business. It is a spread business where we take a very long-term approach to managing those assets and liabilities. Just a moment on the diversity of the funding. We have three primary sources of funding that we utilize. Investment agreements or IAs, which are issued through MBIA Inc. and guaranteed by MBIA Insurance Corp. are representing about $16.1 billion of the outstandings; medium-term notes or MTMs, are issued by MBIA Global Funding and also guaranteed by MBIA Insurance Corp. That is at $9.4 billion. And term repo, which is entered into with high-quality global banks at $1.2 billion. A key point here is that these aren't separate programs. They are just different sources of funding that we use for our unified A/L product segment.

The diversity of the funding platform allows us to access different investor bases at different points on the yield curve and results in an optimized liability profile. We operate with a tight match between the assets and liabilities, as we will discuss later. The bottom line is it is a very, very solid business. And as Chuck mentioned in the second half as been robust; third and fourth quarter had record volumes and we took advantage -- we were taking advantage of wider spreads offered in the market within that business. But over a longer haul this is a business that we've been operating successfully for over 15 years through the numerous economic cycles and dislocations that we've all experienced.

Supporting the liabilities is a high-quality asset portfolio which is displayed on the next slide. Let's talk a little bit about this slide. If we take a look at the sectors as depicted in the pie chart I draw your attention to the more topical sectors being discussed today. That would be nonagency RMBS and the ABS CDOs which we believe we have manageable exposure to. You will see within that chart some [FAQs] data. Let me talk about each of these sectors.

Within the nonagency RMBS 8.1% of the portfolio or $2.4 billion is in that category. Virtually all AAA rated with 53% of that portfolio being wrapped. Small component, 1.35% or $411 million of that portfolio is direct subprime or MBS which itself is all AAA rated and sits at the top of the capital structure in terms of our investments. We are very comfortable with that portfolio.

Within the ABS CDO portfolio it represents about 6% of the overall portfolio or $1.789 billion. It is 100% AAA rated by Moody's and S&P, 65% of that portfolio is wrapped. We have modest allocations to high-grade of $864 million, mezzanine approximately $872 million and minimal exposure to CDO squared at about $54 million. Of course you recognize the likelihood for ratings migration given the actions that we've seen in the market and that Chuck mentioned. But we do believe it to be manageable within the context of the overall portfolio. Why? It is a granular segment of our portfolio, represents 35 separate deals, 95% of these transactions attached at the senior or super senior levels. And indeed we have it diversified by vintage and manager. Even taking into consideration that potential for rating migration that inevitably occurs during downmarket cycles, on the small segment of the portfolio that we are talking about we do feel comfortable with the overall portfolio. Again, it is a high AA average quality from both Moody's and S&P. Cutting through and looking through without the wraps it remains AA, AA 3, AA minus. Less than 1% of this portfolio is BBB, and we have de minimis loan investment grade exposure, a little less than $6 million. Additionally, it is also very diverse. It is invested in over 60 different subsectors. And with an average size holding of $20 million. So it is a good, solid portfolio, continues to perform well actually throughout this market volatility.

Moving onto the next slide, we talked about the funding platform, the asset portfolio. Now let's talk about how they come together in our ALM approach and strategies. In essence, how do we manage the ALM book? One of the key objectives of this book is to remain duration neutral. So therefore duration is closely matched in the portfolio and not only on average, but throughout the entire yield curve. That is what we mean by partial duration match. We also apply interest rate stresses to ensure a durable match, using varied yield curve shapes, levels and stresses. The bottom line is there is not a lot of movement between the asset and liability cash flows by design.

Another reason why that match is [tight] is because you have very laddered asset and liability portfolios. I think it is worth noting that the weighted average life of the liability portfolio is over five years, and that over $13.5 billion of the $26.7 billion of liabilities have maturities that stretch out from five years all the way out to 40 years.

I think it is also worth reemphasizing that we maintain a diversified funding source -- again, investment agreements, MTMs, repo -- over various products, various maturities, various markets. When we combine this with our investment portfolio, that puts us in a very strong and flexible financial position.

From a liquidity perspective, tests are run to ensure that we have adequate resources to cover liquidity needs, even under severely stressed scenarios, as Chuck mentioned earlier. At the end of the day, it is a funded business, it is backed by a high-quality portfolio, generating predictable cash flow, with additional access to liquidity from cash on hand, repo and/or sale of securities.

Moving on to the next slide, we have taken very careful consideration to the liability characteristics. As we built the ALM business, we were carefully paying attention to the impact of downgrade triggers and the flexibility of liabilities, and withdrawals of those liabilities that are present in some of the investment agreements.

That is a key reason why we built a diverse funding platform that contains both MTMs, in-term repo, which represent about 40% of that liability stream. Those are not subject to flexible withdrawals or downgrade provisions.

About 75% of our investment agreements do contain flexible withdrawal features, which is typical for these types of contracts. But the flexibility is only with regard to specific construction or debt service payments. When needed, they do not allow for discretionary withdrawals.

All right, let's move on to downgraded risk. And here, we are talking about the downgrade of the insurance Poor's AAA rating. And here I would go to the chart, the box and the chart. What we laid out here was various credit gradations that we are looking at for the business, from AAA down to BBB. In the middle, we have the liability book value, which of course starts at that $26.7 billion.

Then in the right-hand column, we have a title known as free collateral. That is collateral that exists on the balance sheet that is unpledged, therefore, free to pledge or sell, $19.3 billion. So just by subtracting those two numbers, you can see that we start out with some of our deals, about $7.4 billion worth, already collateralized.

Now what happens as it migrates? To the AA level, there is really no material impact at all. You can see that in the first column -- middle column, liability book value; it shrinks by $100 million. There is a $100 million termination. And there is a small amount of additional collateral postings that are needed as you can see by the collateral number going to $18.6 million (sic).

So not a lot of impact at the AA level. As we move down to the single-A level, you can see here that we do have some terminations, a little north of $2.5 billion. And we do have additional collateral withdrawals, but in that free collateral section you can see that we have ample collateral to handle, even at the single-A, level the requirements that would occur in the unlikely event that a single-A was hit.

The final line here is the BBB category. And here with regard to terminations, you can see that a large component of the investment agreements do terminate. We drop from $24.1 billion to $11.6 billion. But even in that event, we are still left with an $11.6 billion liability stream, with free collateral $9.4 billion. Again, the point here is there is ample collateral to handle credit migration. And that was purposeful, and we paid attention to that when we were constructing this business.

I don't have a slide, but I do want to -- I did want to spend a minute or two on the conduits. There is a lot of information available on the conduits in our FAQs and Q&As. But some of you had asked additional questions around it, and so let me respond to those.

Our conduit segment, which is also on the balance sheet, consists of two separate programs, AAA 1, that is our CP program rated A1/P1 by S&P and Moody's. That is about $855 million of outstandings. In our medium-term note program Meridian Funding, which is rated AAA/AAA by both Moody's and S&P, outstandings of about $3.4 billion. The purpose of these vehicles are to provide funding for MBIA insured client transactions. Each asset within the vehicles guaranteed by MBIA Insurance Corp. and therefore these assets go through the exact same underwriting and approval process as any other issuer insured by the company.

Performance on both of these vehicles has been strong. All current transactions remain investment graded, and there has never been a loss on any transaction funded through the conduits. With regard to liquidity exposure the punchline is MBIA does not have liquidity exposure in either of these programs. Why? AAA 1 is 100% supported by liquidity facilities provided by a number of highly rated global banks. MBIA is not required to and has no obligation to fund these assets.

The Meridian MTM program is a matched program in terms of its assets and liabilities. Each asset within the vehicle has a corresponding MTM that matches the cash flows exactly so that no payments would be required on the MTM without Meridian having received a corresponding asset cash flow. And again, just a reminder, there is a series of Q&A's on the website which discuss these programs in detail. The key takeaway is that neither program exposes MBIA to liquidity risk.

So those are the topics that I wanted to cover before I turn it over to Mitch Sonkin I would like to bring it back to a couple of the key takeaways for the asset management segment. First and foremost, the balance sheet is strong. Each of these segments is backed by a diverse and high-quality pool of assets. In addition, the ALM business carefully manages the liability profile, we have a variety of funding sources and that gives us flexibility in managing the business. And throughout the life of all these segments the asset management process, program guidelines have considered and provided for the potential significant stresses, a result our businesses remain both strong and durable.

With that, I would like to toss it over to Mitch.

Thank you, Cliff. Good afternoon, everyone. I am Mitch Sonkin. I am head of insured portfolio management. Please join me and view page 34 in the presentation, which is an outline of what I will cover today. First, we will begin with a brief update of where our backlog of business stands today, then spend the bulk of our time on the two sectors that have experienced stress in the last quarter and have been the focus of most interest and questions. US residential mortgage-backed securities, specifically our prime second lien book and our multisector CDO book.

Before I get into those areas, please turn to Page 35 for a few comments on our overall portfolio and where it stood at the end of the fourth quarter, apart from the high stress areas. This is to place those sectors in context against our total $678 billion net par outstanding. Going into the fourth quarter, MBIA's overall book was well positioned as we entered the downturn in the credit cycle. We maintain a strong and diverse portfolio. 82.5% is rated A or better, and you can find more information on this on page 25 in the fourth quarter operating supplement.

We have a highly diverse portfolio based on asset class, issuer, servicer, geography and vintage. Our largest exposure concentrations are to highly rated stable sectors, general obligations and utilities and to CDOs supported by granular collateral pools. We've achieved successful completion of several high-profile remediations in 2007, most notably Eurotunnel and the EETCs and the legacy airline bankruptcies of Northwest and Delta Air Lines. Our deal structures, control rights and experience enable us to optimize our position, remediating these complex deals. We also had continued to see a positive trend in our below investment-grade exposure as of December 31, 2007 backed only 1.4% of MBIA's net par outstanding was rated below investment-grade on an S&P priority basis at December 31, comparing with 1.9% on an S&P priority basis at 12-31-06.

At December 31, '07 that portfolio was 2.1% on an MBIA rating basis taking into account that our ratings have already been adjusted for some of the deals in the RMBS sectors, which we were awaiting downgrades from the rating agencies on. Our portfolio stress generally concentrates in the US RMBS related sectors, both direct and indirectly through CDO exposures. But we are closely watching sectors which could potentially be impacted by the subprime mortgage fallout, namely consumer credit areas, would be credit cards and autos and of course commercial real estate, CMBS which are both currently performing acceptably and as expected.

We have a deep and experienced and strong surveillance team and workout team to help steer us through these troubled times in credits. While none of us can predict with precision how the economy will perform in the months ahead, we believe we have the team to handle those eventualities.

I would like to start our review of MBIA's back book of business and invite you to join me on slide 36. Here we will talk about our direct RMBS portfolio. And please note the discussion of the mortgage book which I am going to have with you does not include manufactured housing, home improvement loans and high LTV loans simply because these are older credits and runoff, and comprise a small percentage of the overall mortgage portfolio. The credits I am discussing are individual investment-grade mortgage-backed securitizations and do not include any RMBS collateral within our CDO book of business which I will be describing later.

If you look at slide 36 you will see that there are two separate types of RMBS related deals we ensure. The first is the prime business, which has been our main focus. And the second is subprime. MBIA's prime business, which is comprised of first and second lien mortgages to high-quality borrowers with unblemished credit records concentrates on two areas. First, international capital relief and covered bond transactions which are supported by AAA underlying collateral and are conservatively structured and solid performers.

Second, prime home equity lines of credit and closed-end seconds. Both are what we refer to generally as second lien products. HELOCs are floating-rate loans which generally require interest only repayment for a period of time before amortizing, and closed-end seconds are fixed rate, second mortgages which generally amortize principal and interest from the outset. The reserve we have announced in the fourth quarter directly pertains to the second lien portfolio. And accordingly will be the focus of my discussion today.

In subprime businesses MBIA has (technical difficulty) that only AAA underlying securities in the secondary market. Our exposures per deal are focused on first lien product and are very granular, usually under $100 million. And this book is not showing any material signs of stress at this time.

Now let's go to the next slide, which gives a dollar breakdown on the two areas I have been discussing. Looking at slide 37, our $43.4 billion direct RMBS book, $21.9 billion of that book of total net par outstanding represented by the prime and subprime book is not of concern to us at this time, due to deal structures, performance and attachment points which have significant subordination to protect MBIA's position. MBIA's prime exposure is at 12-31-2007, $17.5 billion, which includes international, which I referred to a moment ago and the Alt-A deals. As you can see, most of this exposure over $13 billion, is international capital relief and covered bond deals insured at the AAA level with ample loss protection. These exposures are almost entirely AAA and performing adequately.

I am going to skip the prime HELOC and closed-end second categories for a moment and discuss MBIA's subprime exposure and some key characteristics. Our total direct subprime net par outstanding at year end 2007, was $4.34 billion. These deals are able to absorb 20 to 35% losses prior to paying claims. We remain optimistic that industry projected loss rates will not materially impact MBIA wrapped tranches of these deals. In response to the aggressive underwriting trends that we observed during the housing boom after 2002, MBIA enacted a conservative strategy toward subprime RMBS collateral and issuers given material market growth and the potential fragility of the business models of second and third tier issuers.

MBIA provided insurance on first lien product only at the AAA class of subprime deal structures since the beginning of 2004. We focused on top tier players. We have minimal indirect exposure to monoline subprime issuers. Over 200 of which have experienced solvency issues in the current marketplace. MBIA's subprime portfolio has been thoroughly vetted by the rating agencies and potential equity partners with the universal view that MBIA's portfolio presents minimal risk loss to the franchise. So due to substantial subordination and deal loss protection on these deals and the selective strategy we took towards direct subprime exposure, we consider risk of material loss to be minimal at this time.

Now returning to our HELOC closed-end second deals, this is the area where we are experiencing stress in our RMBS portfolio. As you will recall, MBIA announced a reserve of $614 million in the fourth quarter ended December 2007. The reserve directly relates to 14 closed-end second and HELOC transactions with a net par of approximately $7.5 billion on deals which were issued from 2005 to 2007. The product composition of the reserve deals are 12 HELOCs and 2 closed-end second transactions. Let's walk through those segments now, and please turn to the next slide which is slide 38.

MBIA is focusing its attention on the prime HELOC and closed-end second portfolios because of the stresses we are experiencing and projecting to experience in these portfolios over the next few years. As shown on the prior slide, our net par outstanding exposure for HELOC and closed-end second was $21.5 billion as at December 31, '07 which is split nearly evenly between the two products. The majority of these deals have been originated over the last two years. MBIA wrapped these deals on a primary basis and attach at a BBB or BBB minus level. The corresponding rating on these transactions is and remains AAA.

MBIA only wrapped prime quality HELOC and closed-end second deals. The weighted average FICO scores for HELOC and closed-end second deals in 2006 was 706 and 719, respectively. And the weighted average FICO scores in 2007 was 702 and 710, respectively. Generally, credit enhancement consisted of over-collateralization and excess spread. MBIA's top exposures for closed-end second and HELOCs represented our strategy of maintaining relationships with top tier issuers as evidenced by the concentration in net par outstanding to Countrywide of $10.8 billion and Rescap at $5.2 billion.

We did focus on these sectors, why did we focus on these sectors for new business in the past two years is a question we've frequently been asked. Historically MBIA had a successful track record (technical difficulty) lien product, experiencing solid returns and performance for a number of years. And historically the nature of HELOCs were high-quality, very low default with predictable performance. Given changing market conditions, the decision to focus on 700 or higher FICO borrowers within these products or remaining cautious on subprime was a tested strategy.

Let's go to the next slide and join me on slide 39, please. So, one may ask, what changed? We're going to pause on this slide for a few minutes so I can explain some key points on current conditions. During last summer we began to notice elevated delinquency levels on several 2005 and 2006 vintage HELOC transactions. Following the virtual shutdown of the US mortgage refinancing market as well as a decline in housing prices, MBIA's analysis indicated that certain 2005, 2006 and 2007 HELOC deals were experiencing the following performance characteristics. First, a rapid increase in delinquencies. Second, the inability of excess spread, which is interest from loans minus fees and interest owed on notes to outpace loan charge-offs; third, the failure of certain deals to either build or maintain the required over-collateralization yield protection cushion targets I discussed a moment ago. Although we had seen increased delinquency levels, there still remained adequate credit protection relative to those delinquencies.

Some of you will recall that MBIA presented our initial concerns on the second lien HELOC portfolio. On our August 2, 2007 investor call on subprime RMBS and CDO exposure flagging to the markets our heightened concerns about these products though the markets at that time were focused primarily on subprime. In October we identified additional deals demonstrating similar delinquency patterns. The two additional months of issuer data highlighted borrowers who by their credit scores would have appeared to have been prime borrowers becoming delinquent and subsequently defaulting in such a rapid fashion not previously noted for borrowers deemed prime. Our observation, which was confirmed in subsequent conversations with issuers and certain about certain loan characteristics including income, documentation, loan purchase, purchase versus cash out and increased CTVs suggested high levels of speculation and potential fraud among borrowers.

We discussed some of these HELOC issues on the third quarter earnings call and as noted in our September 30, 2007 10-Q, MBIA paid small claims on two HELOC deals in late October of approximately $2.5 million. Claims payments occurred sooner than expected, clearly. Increased delinquencies and low recovery levels has to be expected given that these are junior lien products have resulted in increased losses. However, at that time the behavior pattern we had started to see was still in its infancy, and we certainly did not expect defaults to increase as rapidly as they did during the fourth quarter.

In November and December we used the emerging trend data driven by layered risk defaults and developed a modeling strategy to size the potential loss ranges for the second lien portfolio. We will walk through our general modeling assumptions in a minute but in summary yields that had been building over-collateralization and had been and had what we believed for several months, protection, were eroding much quicker than expected due to the levels of defaults rolling through the pipelines.

In early December when we announced the Warburg deal we also stated that the initial results from the modeling strategy I just mentioned resulted in MBIA announcing that it would likely take 5 to $800 million in loss reserves related to the second lien portfolio in the fourth quarter. The range was based on the data we had at the time, and our modeling gave us this indicative range. And recently, using additional data, MBIA finalized loss reserves within previously -- within the previously announced range of 5 to $800 million by setting case reserves of $614 million across 14 deals.

Of the net par outstanding related to the 14 deals from which reserves were taken, $7.5 billion for those deals, $6.9 billion were net par outstanding of HELOC deals, and $600 million were closed-end second deals. We get the question what is the difference between the deals we have taken the reserves against versus those we have not on the balance of the second lien book of $10 billion and what is the worst-case scenario?

First, it happens to be that the vast majority of the deals we have reserved against are HELOC deals. Why, it is hard to say, but it appears that the HELOC transactions consisted of increased levels of borrowers that were more prone to speculative purchases. The speculative nature of the borrower was attracted to an interest only product. Additionally, loosened underwriting guidelines which permitted the layering of risks, more specifically nonowner occupied investor properties, lower documentation and higher CLTV loans resulted in a witches brew which ultimately resulted in claims against our policies. The closed-end second deals are generally younger and they are also a fixed-rate product. They may well have more primary residence borrowers and lower level of investor properties in them. So we are keeping a watchful eye even though their performance has been better, given the market overall.

The deals we have taken reserve against generally exhibit high delinquencies and default rates. And as you would expect are not achieving over-collateralization target levels. Cumulative collateral loss rates can range from 15 to 25% for some of our more troubled yields. The deals that we have not reserved against simply are not showing the same levels of elevated delinquencies and do not produce losses under stress scenarios at this time. Additionally, if a worst-case scenario as predicted by the rating agencies were to occur MBIA certainly had the capital to cover those losses because the rating agency capital requirements are sized to cover the worst case loss scenario. Ultimately, as Chuck mentioned earlier, we are holding capital to protect against losses that can range from 20 to 40% depending upon the product.

The bottom line is that we are holding material amounts of capital against our entire second lien book and therefore we expect to be able to handle capital requirements should poor performance permeate the rest of the portfolio.

Let's go to the next slide, number 40. Here I want to discuss another key question that I am asked; so how did we come to our $614 million reserve number. In order to determine reserves for targeted transactions we've employed a multistep process using various collateral performance scenarios to project losses. HPA was indeed a challenge to address as second lien deal investors do not gain access to complete underlying first lien data. So assumptions were made to determine the length of the housing market downturn and recoveries. And we did not give any credit at all for recent interest rate cuts, increased Freddie Fannie limits and proposed economic stimulus legislation. Loss reserves were calculated as follows.

The first step was to analyze the existing performance trends. To account for loans that were at least 30 days delinquent we used aggressive role rates to force losses essentially to create a CDR, conditional default rate. We assumed 100% loss severity which would eliminate any recovery because of the housing price appreciation as well as address any declines in housing prices. This essentially covered the first six months of the deals as existing delinquencies were then rolled to defaults and flushed through the transactions.

Step two was analyzing future performance. Here, for losses on loans that are current on a go forward basis we calculated losses on the following basis. We took the current three-month average conditional default rate, to project defaults on a go forward basis for months 7 to the end of the deal. 2007 vintage transactions were subject to the greater of the conditional default rate calculated in step one for the three-month conditional default rate. To consider how to treat HPA stress we applied a 100% loss of severity and we used a CDR burnout factor which means how long it takes for the deal to return to a more normalized default rate was employed by us over the next twelve months. Effectively, then the CDR calculated in month 7 is held constant for a twelve-month period and then burns out over the subject twelve-month period. The effect of using this scenario is impaired yield performance for 24 months.

The above referenced assumptions result in a cumulative forecasted collateral loss, which was then added to the existing cumulative losses to date. And the resulting net claims after payments, if any, on the MBIA insurance policy is then adjusted for reinsurance and discounted to an MTV to address the fact that MBIA will recognize losses over time and not in a single period as has previously been described.

So why are we comfortable with these results? Well, we assumed a longer-term stress period despite the fact that the behavior we are seeing is currently appearing to be more idiosyncratic. From a housing price and recovery standpoint we are looking at a multiyear downmarket with elevated defaults throughout this period. We performed extremely detailed analysis on each deal and utilized third parties for verification of certain key assumptions as well as loss projections. We are also more conservative than the actual loss expectations provided to us by issuers.

Now let's turn to the other sector of concern, CDOs, and let's start by reviewing our CDO portfolio. Please join me on slide 41. MBIA's $130.6 billion CDO portfolio is highly rated. 87% AAA and 96% A or better with only 3% rated below investment grade. Exposure is primarily classified into five collateral types, only one of which is experiencing stress related to the US subprime mortgage crisis, the multisector CDO portfolio of $30.1 billion.

Let me first describe the four collateral type portfolios. Investment-grade corporate portfolio of $43 billion has performed as expected and 97% of this exposure is currently rated AAA, and the vast majority is at the super senior level. In other words, MBIA's risk attaches at some multiple of the AAA subordination level. And we do not currently expect any material credit deterioration to this book.

Second, the high yield portfolio of $13.9 billion is largely comprised of low leverage, middle market special opportunity corporate loan obligations, broadly syndicated CLOS and older vintage corporate high yield bonds. Deals in this category are diversified well by vintage geography. Approximately 71% is rated AAA, and 98% is rated AA or better. Likewise, we do not currently expect any material credit deterioration to this book.

The commercial real estate or CMBS portfolio of $43.2 billion is a diversified global portfolio of high quality policy and highly rated structured deals in the global commercial real estate sector. $32.6 billion of our net exposure in this sector is to structured CMBS pools but not truly CDOs. Almost all of this exposure, 99.9 in fact is rated AAA currently. And we do not expect any material credit deterioration in this book.

Fourth, the multisector CDO portfolio is where we experienced stress related to the US subprime mortgage crisis. At December 31, 2007 MBIA recorded $200 million in impairment charges related to 3 diversified CDOs of high-grade CDOs, sometimes referred to as CDO squared deals that possess the largest buckets, by that we mean 20 to 38% of inner CDOs of ABS collateral with a 2006 to 2007 vintage. More details on the multisector portfolio will be provided to you by me shortly. But first, let's turn to slide 42 for key policy attributes on our CDOs.

MBIA is the control party of the CDO's reinsurer. We generally insure at levels well above the natural AAA. We cannot be accelerated against and deal liquidation can be executed by no party other than us. There are three primary types of MBIA policy payment requirements. First, timely interest and ultimate principal; second, ultimate principal only at final maturity; and third, payments upon settlement of individual collateral losses as they occur upon erosion of deal deductibles. The policies are structured to prevent large onetime claims and to allow for payments over time or at final maturity.

So here are the key points to keep in mind. MBIA's payment obligation varies by deal and by insurance type. Negative basis credit default swaps are designed to mimic the financial guaranty policy that is timely interest, ultimate principal, no acceleration. The majority of our multisector CDO exposure is executed in this form. Second, synthetic balance sheet transactions are protections on assets, and they are deductible based. Credit events are limited to failure to pay and bankruptcy. Credit events are settled where net loss is determined typically over 12 to 15 months. After the deductible is eroded, MBIA will pay once the net loss is determined. We typically have walkaway rights upon counterparty failure to pay premium, and we insure approximately $8.4 billion of multisector exposure in this form.

MBIA's obligation to pay is after the specified deductible is fully eroded, as I mentioned a moment ago. Once the loss deductible is eroded or the loss threshold is breached, it is only then that MBIA settles the loss amount associated with each successive credit event and not the full super senior notional. MBIA's exposure within this category of deals is supported by collateral diversified by both vintage and asset type. And of course, last the hybrid where MBIA's payment obligation guarantees only ultimate principal at final maturity or a fixed cap and not interest shortfalls. The more recent high-grade and mezzanine CDO's are executed in this form and the final maturity is 40 and sometimes more than 40 years away.

Now let's turn to slide 43 and the CDO sector of most concern, the multisector CDOs. Multisector CDOs are deals that are diversified by possessing a variety of structured finance asset classes, vintages, issuers and servicers in the collateral pool. First note that the multisector CDOs of $30.1 billion comprise less than 5% of MBIA's total insured net par of $678 billion and 23% of MBIA's of $130 billion CDO portfolio as at December 31st. Collateral in MBIA's multisector CDOs includes; asset-backed securities through securitizations for example of auto receivables and credit cards; commercial mortgage-backed securities; other CDOs and various types of RMBS including prime and subprimes RMBS.

The range of asset classes is found throughout the entire $30 billion multisector CDO portfolio, which is comprised of deals that rely on underlying collateral originally rated A or above high-grade CDOs, and in deals that rely on collateral primarily originated, primarily rated originally BBB. In all cases, MBIA cannot be accelerated against and maintains the right as controlling party within our deals to accelerate at our sole discretion. Acceleration is an additional cash diversion remedy which redirects cash away from subordinate tranches and funnels it to accelerate amortization of our senior exposure.

A note that acceleration is distinct from liquidation of the collateral pool, which MBIA also directs or can direct upon certain events of default as sole controlling party within our deals. A note further that the $8.7 billion of CDO squared exposure, included in our $30.1 billion multisector CDO book represents the total pre and post 2004 outstanding exposure for MBIA. In the past we had focused on 2004 to the present. Unless there be any confusion as of September 30, our total CDO squared exposure was $9 billion but the portfolio has amortized by approximately $300 million during the fourth quarter to bring us to the $8.7 billion level.

Now let's go to slide 44 to review subprime mortgage performance issues affecting the multisector CDO book. MBIA's multisector CDO book had performed as expected through September 2007. US residential mortgage market downturn began to directly impact the multisector book in the fall of 2007 as the rating agencies downgraded thousands of investment-grade RMBS deals due to deteriorating performance. Market illiquidity and the large number of agency downgrades resulted in deals reaching triggers. And as a result actively managed deals became static and triggered rating tests so that the cash normally distributed to junior noteholders was now being diverted to amortized senior noteholders, including MBIA as the senior note guarantor. So this was to our advantage.

To date the majority of MBIA wrapped multisector CDOs and the underlying collateral remain investment-grade rated. But further deterioration is to be anticipated based upon projected US housing market trends in 2008 and indeed six MBIA insured tranches have been downgraded by one or more of the rating agencies. We will continue to monitor and re-evaluate the collateral mindful that we may well see additional rating agency downgrades.

Now let's turn to slide 45. Here we discuss our CDO squared deals of $8.7 billion. MBIA CDOs of high-grade CDOs or CDO squareds are diversified transactions generally anchored by CLOs which are collateralized loan obligations consisting of investment-grade corporate debt. And they contain buckets of other collateral which may include highly rated tranches of CDOs of ABS collateral. No one transaction contains more than 38% of CDOs of ABS collateral as a percentage of the total collateral base. The deals are diversified by collateral and vintage with 47% originated from 2005 and prior, 30% 2006, 23% 2007. The underlying collateral ratings as if December remain strong with approximately 70% of the collateral rated AAA, 17% AA, 8% A, 3% BBB and only 2% rated below investment-grade, again as of December 10, '07.

As of December there has not been any material rating agency action in this portfolio segment. However, as we will discuss, our own analysis has determined that three deals within this segment will be impaired, which we quantified to be $200 million. As I mentioned before, we are continuously reviewing any new rating agency actions, including downgrades that may occur. And most of these deals asset performance is guaranteed versus the normal MBIA guarantee of liabilities. In other words, these are deductible deals. In these deals our obligation to pay net losses is only after the deductible is fully eroded. I refer to these types of deals in slide 42 where I described our policy payment requirements.

Please turn to slide 46, and let's take a deeper dive on the CDO squared deals and how we determined impairment. As we announced, and as I've mentioned, we recorded a $200 million impairment across three CDO squared deals at December 31st. The analysis entailed, however, looking at every ABS CDO within the CDO squared structures. We determined what tranche was referenced as collateral, meaning where we in a AAA, AA or A tranche. If the collateral was not at the top of the capital structure, and/or it had minimal subordination below us, given the subprime mortgage lost estimates we took a conservative stance and concluded that the deals tranche was likely to have its cash flow diverted and subordinated to the tranches above us. Simply with that fact one missed interest payment could constitute a credit event. And therefore the clock starts for a period of time, say 15 months.

Settle that piece of collateral and at the end of that period whatever the value is below 100% reduces our deal subordination. So this process was followed for each piece of collateral in every deal upon a credit event. If enough credit events occur with below 100% recoveries, eventually the deal deductible will be fierce and MBIA would start paying claims at the end of each 15 month settlement period. Unless we buy the collateral ourselves, we would never benefit from any future recoveries.

We also assumed conservative recoveries for the collateral we deemed likely to hit the credit events I was mentioning. In fact, we usually ascribed a zero value to that recovery. And the indentures of the inner CDOs of the ABS were reviewed to fully determine the impact of triggers on the deals cash flow. Upon realization that impairment was probable and estimable, MBIA set loss reserves on these three deals though we have not paid claims on these deals and may not for at least the next few years.

So what do we see ahead for the multisector CDO book, and what are the takeaways? Let's go to slide 47. Clearly we expect stress on the book. We are, however, the control party in all our insured deals governing acceleration, liquidation and manager removal rights. As of year end, the CDO multisector CDOs were beginning to incur events of default, as I had mentioned, and we expect further trigger breaches in select deals due to rating agency downgrades and underlying collateral defaults. The effect of these downgrades on the portfolio is as follows as you can see. As a result of the downgrades the average rating factors will increase, and as the percentage of BBB and lower collateral increases, structurally designed collateral haircuts will result in deals tailing asset coverage tests. Failure of such a test would cause cash flow to be redirected to amortize the senior notes instead of paying interest to certain classes of subordinated noteholders causing an accelerated amortization of the senior notes and benefiting our insured tranches. And manager removal triggers would also be breached.

We are tracking performance of inner CDO and ABS buckets in deals vis-a-vis controlled party actions. And we know the subprime RMBS collateral is a risk to future performance but given high-grade attachment points to date, most downgrades remain investment-grade. A few takeaways on the multisector book as we wrap up that piece.

First, MBIA has set the impairments of $200 million against three CDO squared transactions although claims will not likely be paid on these deals for at least two years. Next in event of default in respect of one of MBIA's insured deals resulting from ratings impacts would be beneficial to us as all cash would be diverted to our senior insured class that we wrap. This cash trapping serves to potentially delever the insured notes even faster. Our current capital raising efforts assume further material stress on the multisector CDO book. Implied stress loss rates on underlying subprime mortgage collateral by us and using our internal assessments and rating agency models are well in excess of currently expected losses at this time. And we do not face liquidity or acceleration risk in the CDO portfolio and expected or eventual claims do not pose a liquidity issue.

We are sometimes asked would we ever accelerate or liquidate a deal. If we were able to exit a position at par or engage in a creative solution that would maximize recoveries, we would certainly consider it. But the point is that the choice to accelerate or liquidate is ours.

Now let's turn to slide 48. And provide a quick look of the commercial real estate portfolio overview. And I am going to be brief at this point essentially because we are quite comfortable with this portfolio. As of December 31, 2007 MBIA's combined net par is structured CMBS pools and CRE CDOs, the first two categories on the slide, totaled $43.2 billion. The CMBS pools are included in our total CDO exposure set out on slide 41, although they are in fact structured pools, not subject to CDO structures.

The third category commercial real estate loans, comprise $6 billion. All three segments total $49.2 billion or about 7% of MBIA's total net par outstanding insured portfolio. Allow me to describe key points for these segments a bit further. The CMBS portfolio is a diversified global portfolio of high-quality and highly rated structures in the commercial real estate sector. This portfolio includes structured commercial mortgage-backed securities and commercial real estate CDOs. Structured CMBS pools are pools of CMBS securities that are structured with a first loss deductible sized to a AAA or multiple AAA level of credit protection before consideration is given to the wrap provided by MBIA. The CMBS securities in the pool are either cash assets or more typically referenced synthetically. Each pool consists of CMBS securities to run from 27 to 80 different CMBS securitizations. And each securitization from which the CMBS are drawn is backed by a pool of approximately 250 loans secured by approximately 300 different commercial real estate properties diversified by property, location and borrower.

The CMBS collateral is virtually all ten-year fixed-rate first mortgage loans and as such is well insulated from any near-term refinancing risks. And the structured CMBS pools are static, meaning the pool at origination cannot be changed. CRE CDOs are managed pools of CMBS. CRE whole loans, E notes, mezzanine loans and REIT debt that allow for reinvestment during a defined time period. The structures benefit from typical CDO structural protection such as cash diversion triggers and collateral quality tests and manager replacement provisions.

Although the assets within CRE CDOs can be shorter term floating-rate loans these loans are underwritten to high stress scenarios are made to very strong sponsors and comprise less than 15% of the collateral in our commercial real estate CDOs. Almost all of this exposure is currently rated AAA. And at the current time we do not expect any material credit deterioration to this book.

Now let's turn to slide 49 to address the question of the current state of the commercial real estate market. MBIA's commercial real estate portfolio is well positioned for any market downturn. Current commercial real estate fundamentals remained strong overall, with near record low delinquencies and even seasoned delinquencies being low. Favorable supply and demand equilibrium yields strong -- pardon me -- yields a strong market going into a recession in the history of CMBS.

New supply has been very moderate with very few markets exposed to speculative construction unlike what we saw in the 1986 to 1992 and 1999 to 2001 time periods. The urban office sector is strong with [full-in] vacancies and increasing lease rates in 2007 through strong demand for multifamily as ecoboom and weak single-family markets stir that sector. Retail has held up well despite consumer weakness although we would expect some future softness here. And hotel travel is still strong but again, we would expect to see some increase in defaults in light of an economic downturn.

While the market expects delinquencies to increase as the economy weakens, defaults are not expected to exceed historical levels of 0.90%.

A quick word on CMBS, REITs and corporate spreads. Massive spread widening is occurring at all levels since August of '07 which Chuck mentioned has impacted our fourth-quarter mark-to-market. The spread widening has been caused by subprime contagion and the use by the shorts as a proxy to micro economy. Natural long investors in commercial real estate do not play in the CMBS market and thus there are a few long players against the determined short selling by hedge funds. The CMBS indices widened at all rating levels despite strong fundamentals.

In order to sum up, let's turn to slide 50 for some key takeaways. The overall question is why is MBIA comfortable with our commercial real estate exposure? As you can see, CMBS is not subprime. There is no finance company risk related to insolvency and servicing. The property level due diligence is up front. You've got sophisticated third-party residual buyers with strong credit perspectives performing in due diligence before they purchase. Standardized servicing and reporting with multiple IT sources are available to track property performance of submarket lease rates, vacancies and new supply trends.

Underlying loans are generally ten-year fixed-rate loans with amortization. Typical CMBS borrowers are well capitalized REITs or property investors with sophisticated property management skills. And CMBS is a cash flow lending business as opposed to a property valuation play.

During the course of 2007, rating agencies proactively increased rating standards and enhanced the levels on these deals. This concludes my portion of our presentation. We designed this presentation to try to broadly answer as many questions as we receive relating to the RMBS and CDO book.

It is important to remember that we [survail] and annualize our deals yield by yield constantly. We look at a variety of factors. We work with servicers, trustees, and we prepare our analysis accordingly. This is not a one-size-fits-all analysis that some would have us believe. It is granular. And while we are living in extraordinary times with circumstances changing rapidly, with new pronouncements of supposed expert analysis appearing regularly, we have a talented and experienced surveillance team dedicated to these deals, and they know the deals in the sectors. Our crystal ball may be no better than others, but it is at least as good. Thank you.

Well, thank you, Mitch. The analysis that Mitch just got finished describing really underlies both the analysis that MBIA have loss reserves and impairments but also our analysis of the capital requirements that we have gotten from the rating agencies. We are confident at this point that the reserves in the impairments that we are recording in the fourth quarter capture the current expected loss. But I just want to be clear, and I know Mitch touched on this a number of times about the level of uncertainty in the environment, we believe that it is really the capital position that we are building that covers us against the potential unexpected loss. And it is important to reflect on both of those elements of our plan.

We are monitoring our portfolio. We are monitoring the general housing market and we are monitoring the rating agencies quite carefully to try to understand where new capital requirements may come from. And it is our expectation that our position will continue to meet all requirements and will continue to help us to rebuild the credibility with investors and the rating agencies and our customers.

So with that, I would like to turn to Gary for the wrap up.

Thanks, Chuck. I know we've given you a lot to digest today in two short hours and we certainly appreciate your attention and interest. We have attempted to address as many questions as we could in the presentation that we received over the last day or two.

I think to sum up, I'd simply say that MBIA has the experience and the resources to manage through this crisis. If you will allow me to get more mileage out of my earthquake metaphor, the ground has literally opened up below us all in the industry, but our house was built on a solid foundation of a sound strategy, substantial financial resources and talent base unparalleled in the industry. We have led the industry for over thirty years because we know how to balance risk prudently, to moderate the impact of volatile credit cycles. Our substantial base of previously originated insurance and investment income is a stable source of future revenues and capital formation and this will protect us during the downcycles. In fact, it is during times like these the uncertainty about the housing market and the economy that our product is even more desirable, especially when rating stability is achieved. We know of our very substantial and very profitable business opportunities out there, and we are poised to take advantage of them. We are armed not only with strong business fundamentals, but also with a solid belief in our company. Combined these two qualities will ensure our success going forward.

So thank you again, and now I would like to turn it back to Greg for the Q&A portion of this morning, and now this afternoon session.

Here we go, yes, as Gary said a lot of questions have been responded to. Before we get into the specific questions, let me just read the Safe Harbor disclosure even though it was provided earlier in the slide book; I realize some folks don't have a slide book available as they participate on the phone.

This presentation or remarks may contain forward-looking statements. Important factors such as general market conditions and the competitive environment could cause actual results to differ materially from those projected in these forward-looking statements. Risk factors are detailed in our 10-K which is available on our website at www.MBIA.com. The company undertakes no obligation to revise or update any forward-looking statements to reflect changes in events or expectations. In addition, the definitions of the non-GAAP terms that we have included in these remarks may be filed on our website at www.MBIA.com.

Now we will kickoff the Q&A session. The format of the question-and-answer session for today's call is very similar to the one we used during our August 2, 2007 webcast and conference call, on our subprime RMBS and related CDO exposures. We received a very significant amount of very favorable feedback from that event, and specifically from the Q&A session. As we have several respondents involved in today's event, submitting questions in advance provides us the opportunity to better organize for providing responses. It also provides us with the opportunity to be more responsive to more detailed questions that are more difficult to address during our typical earnings conference calls. As already mentioned, we intend to respond to as many questions as possible, and we will be here for a fair amount longer to do so. In fact, we already know that we will be providing responses to a far greater number of questions than we have every received in any of our prior conference calls over the last several years.

To demonstrate the power of the Democratic process we have organized these questions by popularity or commonness. In other words, we will be starting with the most often asked question first. One last comment on the format for today's Q&A session. I would be remiss if I didn't acknowledge one other side benefit from our decision to accept questions only in writing. We clearly acknowledge that we are taking the microphone, as it were, out of the hands of those inclined to ask questions of us. In the recent past several such people have abused the privilege and used it as a soap box to raise criticisms, complaints, rant or fail to ask coherent questions. Many of these people have effectively become adversaries of our company, our employees, our clients and our business relationships. Many of them have demonstrated no problems finding media outlets to proselytize their messages against our company.

We see no reason to provide them with another forum to do so. Here are a few summary facts about the questions that we have received so far. We are now up to over 282 questions, many of those have been responded to in the earlier remarks. We have over 60 questions which we will now individually cover one by one. Chuck, most of the questions in the beginning are going to be for you given the popularity contest that we use. So let's start off.

We will provide attribution where permission has been granted for us to do so. So the first question again is for Chuck. It was submitted by the likes of Bill Ackman at Pershing Square as well as Geoff Dunn at KBW. The specific question is, what is the current cash balance at the parent company, and what is the annual debt service amount per year over the next five years?

Thanks, Greg. This is Chuck. Again, the cash balance as of year end was $434 million. And the annual debt service at this point is about $80 million per year on the outstanding debt at the parent, is about $1.2 billion. We do have two maturities that are coming in 2010 and 2011. Each of them are about $100 million. So there would be a reduction in debt service thereafter. But that is, so again current balance $434 million as of year end.

Follow-up question, what size capital infusion would be necessary to maintain the holding company's operations?

The holding company operations really consist of nothing other than paying the interest on our debt. There is the miscellaneous holding company expenses, the total of them is about $117 million per year of interest and expenses. Then we have shareholder dividends and shareholder dividends obviously are a charge that can be variable at the holding company level. There isn't any -- when we say capital infusion it is not quite clear where we are going. The holding company does receive cash from the insurance company, and it can receive cash from the asset management company. And what we have been doing is using the earnings in the asset management company to add to the asset management capital base, so that we can grow it. So that most of the cash in the holding company has either been from interest earnings on the cash holdings there or dividends from the insurance company. So there isn't any circumstance in which a capital infusion, per se, is required.

One more for you Chuck, this one was also submitted, among others, by Bill Ackman of Pershing Square. Of the $433 million of cash and investments at the holding company how much is unrestricted cash which is available to pay debt service, operating expenses and/or dividends?

What is the breakdown of cash and investments at January 31, 2008 reflecting funding obligations since year-end including dividends, interest payments and any other expenses excluding any funds received from Warburg Pincus?

Got it. I think the question is any part of the cash investment at the holding company pledged to any third party and the answer to that is no. It is made up of liquid assets and all of the $434 million is available to pay expenses and debt service at the holding company level. The portfolio is about 60% treasuries and other money market securities and about 40% high-grade corporate bonds. With respect to the cash balance after 12-31 we have not actually -- we haven't stricken a balance sheet as of today to date, but I can tell you that in January we do have -- we did pay shareholder dividends that are approximately $43 million. And there was interest expense in the month that is about 6 or $7 million.

Okay, Mitch, the next cluster are going to be for you. But before I ask the first one I forgot to mention that the webcast portal for submitting questions we are told by our vendor service is not functioning properly. We have received lots of questions by the email account, so please if you have questions submit them through email and we will try to get them in, as well.

Mitch, again, Geoff Dunn was among the people who had this following question for you. Can you please define what a credit event is and its impact on MBIA CDO portfolio?

Sure, Greg. I went over this in my presentation but let me try to go back over it. MBIA generally covers two different types of credit events, failure to pay or bankruptcy. In the multisector space the ABS and CDS securities are bankruptcy remote. Therefore they cannot declare bankruptcy. So this limits the credit events to failure to pay interest or failure to pay principal. If a putback tranche experiences an interest shortfall that would be considered a credit event. This credit event would erode subordination when settled if a 100% recovery was not achieved on that piece of collateral.

As I mentioned, credit events are settled and any loss is determined typically over 12 to 15 months. So if the deductible is eroded, MBIA will pay claims once the net loss is determined on individual credit events if there are less then 100% recoveries. We typically have walkaway rights upon counterparty failure to pay premium. As I also stated, we determined that three CDO squared deals would face enough credit events with low recoveries to warrant an impairment and therefore we took the $200 million charge in the quarter.

The next question was among those asking it were Mark Lane of William Blair & Co. What is MBIA's breakout of interest and principal and principal only guarantees? Can you please define what ultimate principal means?

Let me try to do that. In our CDO book we typically issue a P&I policy for CDS that mimics a P&I policy. P&I policies cover timely interest and ultimate principal. Our payment obligation varies by deal and by insurance type. Negative basis credit default swaps are designed to mimic a financial guaranty policy which is timely interest, ultimate principal, no acceleration. The majority of our multisector CDO exposure is executed in this form. Synthetic balance sheet transactions provide protection on assets and are deductible based, as we previously stated credit events are limited to failure to pay and bankruptcy. Credit events are settled, and any net loss is determined typically over 12 to 15 months. After that deductible is eroded MBIA will pay once the net loss is determined on that event.

We ensure approximately $8.4 billion, $8.7 is the entire CDO squared population but two of the three older CDO squared are cash low P&I. So it is $8.4 billion of multisector exposure in this form. Our exposure within this category of deals is supported by collateral diversified by both vintage and asset type. And the payment obligation may just guarantee only ultimate principal at final maturity or fixed cap with no interest coverage at all. The more recent high-grade and mezzanine multisector CDOs are executed in this form and the final maturity is 40 years plus away.

Looking at the payment types in the CDO book, timely interest and ultimate principal typically applies to most of our multisector CDOs, CRE CDOs, high yield corporate CDOs and CLOs. Ultimate principal only at final maturity on these deals to certain multisector deals. Payments upon settlement of individual collateral losses as they occur upon erosion of deal deductibles applies to the multisector CDO squareds, corporate pools and CMBS pools.

[Minal Mehta] at [Pallatine Partners] was among those who provided the following comprehensive question. With regards to your subprime RMBS CDO exposure for securitizations that contain loans that clearly should not have been in those structures, particularly in the 2006 and 2007 vintages, what is the quality of the reps and warranties that you received from the originators? And do you have any legal remedies against the originators of these deals that you subsequently wrapped? And then a follow up are you seeing any evidence of fraudulent loans that violate the terms of reps and warranties that you were provided with?

Good and interesting questions. Most RMBS securities are of course issued with reps and warranties. The deals do also typically allow for putbacks -- those are required buy backs of certain loans that reach the reps and warranties. Unlike in the case of our primary RMBS wrapped deals where we would drive the process of insuring reps and warranties weren't breached. In CDO's we are one step removed and would rely on the collateral manager to ensure that the loans going into the trust were appropriate and we take appropriate actions if that were not the case. In our direct book, however, there are reps and warranties related to both origination and ongoing servicing. And we are endeavoring as we speak to ensure adherence to those reps and warranties with the issuers we wrap. We will conduct reviews, and we will determine whether or not there has been and will continue to be on an ongoing basis compliance with the reps and warranties.

Next question, when is the usual maturity schedule of securitizations, e.g. RMBS CDO and CMBS. Does each tranche have its own maturity? Ultimately in event of a claim when would the principal payments be paid for each of the respective types of securitizations and tranches, if applicable?

Let me try to take these in pieces. The maturity of our ABS CDOs is typically pegged to the legal final maturity of the transaction. The maturity dates on ABS CDOs must be beyond the legal final of the longest dated individual piece of collateral. However, we would expect that the insured senior notes will amortize prior to legal final as cash is trapped from the waterfall to pay down the notes and sequential order benefited that provision. Our principal and interest policies would pay timely interest and ultimate principal at final maturity.

In respect to RMBS, although most deals have the legal final date approximately 30 years from the date of closing, the majority of these deals have historically paid down to 50% or less of their closing balance within four years of the closing date. However, as you would expect given the current economic environment, we are where we are seeing depressed housing prices and currently a lack of refinancing options, we expect this timeframe to lengthen somewhat.

Is it possible to gain recoveries on paid claims of your RMBS deals?

Yes, it is possible. The modeling assumes that during certain periods the deals are going to generate enough excess spread to(technical difficulty) for previous draws on our policies. So the losses that we incur are lower than cumulative deal losses. In the current modeling that we are doing the defaults and the losses are realized earlier in the deals life given current trends and when those heightened default levels begin to burn out over time eventually excess spread can provide some level of recoveries.

This one is very similar to one that you answered a couple questions ago. How does the repurchase mechanism work for RMBS deals under the rep and warranty clause?

We can't specifically force the originator to repurchase the loan unless the loan breaches a specific rep or warranty. And those reps and warranties would typically include but (inaudible) they are not limited to references to loan characteristics and documentation requirements. But an example of a rep would be as follows. At the closing date with respect to the loans the mortgage file for each mortgage loan contained each of the documents specified to be included in it. Or as of the closing date with respect to loans each mortgage loan was originated in accordance with the Company's underwriting guidelines. Those would give us some guidance for the reps and warranties that we can then go back and measure against compliance.

Thank you, Mitch. Chuck, the next several are for you. It was disconcerting for Moody's to take its action after all the actions that MBIA was able to effectuate. What are your next steps? Did you have excess capital with Moody's earlier capital requirement, and if so how much?

Thanks, Greg. We are going to continue to work with Moody's to try to get them and our rating back to AAA stable. We believe that that is where this is going to go ultimately. With respect to the capital requirement actually in my prepared comments I talked about the excess capital position that we have and show that as of year-end pro forma for our capital plan, we have about 750 to $1 billion of excess capital on the rating agency models. And the Moody's, the excess that we would have against the Moody's model would be within that range.

Here is a related follow-on. When is Moody's expected to complete its review? Has MBIA been told anything by Moody's since their rating action on January 17, 2008, and when could it possibly be resolved?

Moody's has not stated a timeframe on which they would wish to complete their review. Typically review statuses, though will last 60 to 90 days. Again, we are working with Moody's pretty assertively and every day to try to get to an answer as quickly as possible. I mentioned earlier that they are considering -- that they are doing an industry level review. And it is hard to believe that they will actually come to a rating conclusion on us until they get done that industry level review. But again, to the extent that they are focused on the long-term demand for the financial guaranty product, we think that the outcome of that will be affirmative. But I understand and respect their need to actually go through that process in they deliberate manner.

Okay, building on the Moody's theme, regarding Moody's latest action, what if anything can you do if Moody's requires you to raise additional capital?

Good question. We think that with the capital base that we have established, again referring to the excess of overall rating agency requirements of 750 to $1 billion which grows over time given the business production that we've seen and expect in the first quarter of 2008, we would anticipate a pretty meaningful increase to the cushion that we are showing at year end. So to the extent that there are additional requirements from the rating agencies we think that we are in a pretty good position to fill them. You might notice that S&P revised a part of its analysis of the subprime content of our CDOs a couple of weeks ago. They made an adjustment; our capital still shows an excess to their requirements that is quite substantial. We think that we have established a robust capital position, one that is able to withstand things that go bump in the night in the portfolio.

Given Moody's latest action on Channel Re -- this is sort of a transition question -- it was provided by, among others, Jerry Solomon at Bear Stearns and Scott Frost at HSBC. What would happen if you had to take the Channel Re book of business back? Would you have an additional capital requirement if you took back the Channel Re reinsurance?

What would happen if we took the book back of course, that our capital requirement would go up. And as I said, the amount of capital benefit that we get from Channel is 700 million to $1 billion. Of course, we would recapture also the premium associated with that business. I think that it is unlikely that that will occur because again, Channel is on review for downgrade with Moody's. We don't anticipate at all that there is any risk that Channel Re would be downgraded to the point where we would get no capital credit for the reinsurance.

So again, we don't think that is in the cards. But of course, to the extent we took the business back there would be an increased capital requirement associated with it. I should mention again that part of reinsuring to Channel Re is that we get the benefit of cash collateral into trusts that support the capital benefit. And we would expect that to the extent that Channel Re were to be downgraded that the portion of our exposure that would be most impacted might be that which is not covered by the cash collateral. And that is not crystal clear in all of the rating agencies guidelines. But it is a discussion that we've had with them.

Okay, Geoff Dunn was among the people who asked the following question. Is Ackman's number correct for Channel Re's CDO exposure from MBIA?

With respect to exposure, I don't have the Ackman report in front of me, but again, we have ceded about $43 million of exposure to Channel Re. That is about half of our total reinsurance program. So to the extent that that is the number that he's got in his report, and I think that is close, then that is correct.

Tim Bond from JPMorgan asks, giving your conversations with Channel Re and with the rating agencies, what do you currently project as a worst-case scenario given your large reinsurance exposure with the company? Will there be a haircut of the reinsurance exposure to 70%, 50% or more?

I think with respect to Channel Re you've got to focus on two things. A, it is a AAA rated company and at least with respect to the tight exposures that MBIA is having the most problems with in our prime second lien portfolio, Channel Re actually has relatively little of that. So from an economic perspective their exposures are really not all that great. However, the rating agencies are going through this analysis of the Channel Re CDO portfolio just as they did with MBIA and the other primaries. And there is the potential anyway for Channel to have additional capital requirement. To the extent that Channel has an additional capital requirement it has strong, well capitalized owners that would be in a position to make additional capital contributions to Channel Re.

So there is a lot that has to happen in order for Channel Re to be downgraded. And then to the extent that Channel is downgraded, we expect that the cash collateral mitigates the impact of any increase in capital requirement that might flow through the agency models. And then even -- and even beyond that it is our expectation that what we are talking about is the potential really for a downgrade from AAA into the AA range not to the level where we would lose all capital credit for those exposures.

Last one for you Chuck in this stretch. Ackman raises some interesting comments on Channel Re. What is the exposure there; especially with the write-downs by PartnerRe and RenRe?

The exposure is that MBIA, like PartnerRe and RenRe and Koch Industries, all of the owners of Channel Re, will have the issue of the mark-to-market on Channel Re's exposures, which will bring the GAAP book value of Channel to below zero and those companies will all, no doubt, reflect a write-down in the carrying value of their investment in Channel Re to zero. This is based on a mark-to-market that does not at this point reflect material cash losses.

It does not impact on claims paying ability accept to the extent of impairments and is expected over time to reverse. So as that mark-to-market reverses, then Channel Re's GAAP book value will increase, become positive again, and the investors will then start to reflect positive investment value on a book basis in their own books and records. So from an economic perspective sort of nothing has changed other than Channel Re has a small allocation of the impairment that MBIA took in the fourth quarter. The mark-to-market other than that doesn't really impact on our evaluation of our investment. And we would think on the other owners of Channel Re's evaluations of their investments either.

Mitch, this one is for you. It is from Mark Lahoda at Vanguard. Can you discuss the potential liquidity demands for the CDO squared transactions that are subject to deductibles? Can you provide a better sense of how impairment charges and liquidity payments would go up if cumulative loss rates on the underlying subprime collateral were to increase to 10%, 15%, 20% and 25%? What loss rates are reflected in current impairment charges?

Given that these deals are asset coverage deals, which means MBIA pays claims once accumulated losses on the individual assets reach above our deductible or level of subordination. Once at that level as I mentioned in my presentation after a specified evaluation period you'd cover losses on each successive asset credit event. So we would expect payments on these deals to begin in 12 to 18 months and last for a period of several years. The CDO squared analysis to date has really focused on what we believe will be the most volatile collateral in those deals, which is the ABS CDO bucket. Given the nature of these positions, it is equally if not more important to analyze the deal structures through an in-depth analysis of the transaction legal documents as it is to analyze their underlying collateral performance.

Items such as over-collateralization triggers, event of default language, control rights over enforcement and liquidation of the collateral are all fully analyzed to determine the likelihood of a credit event for each piece of collateral. And the credit event as I said before defined as a failure to pay interest and principal when due. Severities upon default were assumed to be almost 100%. Given the rapidly evolving nature of the market with increasing liquidations of CDOs we are going to continue to monitor the performance and adjust assumptions as needed.

Chuck, one more for you here. This is from [Michelle Lee] at TIAA-CREF. What are MBIA's debt service requirements on an annual basis? What is the debt maturity schedule?

Great. Again, I am glad that we returned to this question. Our current interest expense is about $80 million, and we do have two maturities coming up in 2010 and 2011. The one in 2010 is about $143 million I had previously said roughly 100. It is $143 million and then the one in 2011 is $100 million.

Okay, Gary, a couple for you. This one is from Gary Ransom at Fox-Pitt. You say the pipeline for international structure finance is heavier than for the US. What is the nature of the deals in the pipeline, in particular are there, are they in some way more immune from the credit concerns in the US?

The deals that we are looking at on the international side are largely leftovers from last year, they include a couple of auto rental fleet transactions and a trucking fleet transaction. And there is a little more inquiry going on over there than there is here but as we've all learned, the world is a very small place. And what affects one area quickly contagious to another area. So it is a marginal thing as opposed to a black and white dichotomy.

Another question. Can you please comment on Warren Buffett's entry into the monoline industry?

There is good news and there is bad news there, isn't there? The good news is that he thinks that this is a vital and potentially profitable business for him; the bad news is he thinks this is a vital and potentially profitable business for him. We like the endorsement. We wish him luck. We realize that there is a distance between here and there in announcing something and actually getting a staff and the licenses notwithstanding the accelerated pace that he is on. We welcome him. He is going to be a very disciplined player in the marketplace, just like he is in his other insurance lines of business. He is going to be a careful underwriter. I am sure he will be a very careful pricer and to the extent that they go after capacity constrained names were there is the most low-hanging fruit, that will be a good thing for the whole industry.

Mitch, this one is for you. It is from [Phil Cunningham] at Lowes. Will you still insure mezzanine CDOs, HELOCs and second mortgages?

MBIA only insured one US mezzanine CDO ABS between 2005 and 2007. And given the current state of the market, we don't see this as a large part of our business going forward. Starting in 2004, MBIA elected to insure mezzanine ABS CDOs only on a more selective basis due to concerns regarding structural provisions as well as concerns we had over the underlying collateral and weak pricing. We had been much more of an active player in the high-grade space where deals were characterized by much stronger collateral, better structural provisions and more attractive risk-adjusted pricing.

We typically guarantee multisector CDO trend CDOs transacted at the super AAA credit support level which often means 1.5 to 2.5 times the credit support level of the AAA rated tranches that are subordinated to the tranche that MBIA guarantees. Regarding the second lien product, we could consider wrapping new business adhering to the lessons learned in the current market under the right circumstances only. And specifically, we would be vigilant to ensure that the underlying loans were to be fully documented, you had high-quality borrowers, conservative CLTVs, deals potentially structured not solely reliant on excess spreads build protection and we would need much better information on the underlying first lien loans. And only then might we consider it.

Chuck, the next one is for you. It is from David Roberts at Angelo, Gordon Company. Can you differentiate between the S&P stressed losses and the one in 10,000 a year loss scenario used by the rating agencies to test for the AAA rating?

First let me defend S&P. They are a rating agency. And then, there really is no difference conceptually. What they are both after is to try to identify what losses would be in a severely stressed environment. S&P's model is to determine if the one that runs the portfolio through kind of a series of depression era assumptions where the Fitch and Moody's models, are both stochastic processes that run many, many observations in order to determine a distribution of potential losses and then pick a spot in the tail at the so-called one and 10,000 year loss level. Conceptually, though, they are after exactly the same thing. If you look at the increased capital requirements that we got from the three agencies even though they have very different approaches and very different assumptions about some of the underlying collateral behavior, there is not a huge range of outcomes that we have seen. So they are estimating kind of the same thing.

A couple more for you, Gary. The first one is what is the status of the New York State Insurance Department bailout, and could the NYSID take over MBIA?

No, easy ones. MBIA is really not in a position to comment upon the status of the New York State Insurance Department's activities. The Department has provided public comments that it would not address any further rumors about its efforts to bolster the stability, confidence of the bond insurance companies.

And the second half of the question about the takeover of MBIA, based on existing statutes of New York State, MBIA would need to be deemed insolvent under regulatory or statutory accounting standards in order for the New York State Insurance Department to undertake a supervisory administration of the Company. Our year-end 12-31-07 stat and financials are not fully addressed yet, but I can assure you that we will be showing a substantial, in the billions of dollars, amount of capital statutory capital beyond requirements for the New York State Insurance Department.

Mitch, this one is from Darin Arita at Deutsche Bank. Has MBIA identified any specific differences between the HELOCs, closed-end seconds that are suffering from higher delinquencies than the HELOCs and closed-end seconds that are performing within expectations?

Good question. Interestingly, the underwriting guidelines do not vary considerably between the HELOCs and the closed-end second loans. However, we have seen a pattern emerge or emerging. Those borrowers and many within the industry felt that housing prices would continue to increase, though at reduced levels. And that led many borrowers to overleverage themselves for home improvement and/or speculation. And we think there is a lot of speculation out there. Because the thought pattern was that if payments got too difficult to handle, the borrower could sell.

Many borrowers then covered themselves with multiple mortgages. The originators either did not verify income, ask the borrower to state their income, or in many cases limited verification to something less than 24 months. Additionally, the mortgage companies, because they were originating reduced documentation loans, did not pay attention to borrower debt levels and generously offered mortgages that allowed the borrower to put little or no equity into the property.

So reality hit when housing prices started to decline precipitously in some MSAs. We feel that because the HELOC product offered borrowers the option of paying interest only for a five or ten-year period, that encouraged speculative borrowers to prefer HELOCs over closed-end second loans. And you will recall from my comments some of the characteristics on the closed-end second loans include, we think, a different type of borrower attracted to a more stable, fixed interest rate and fixed payment environment as opposed to the interest only HELOC deals that we insured.

Chuck, here is a question on disclosure. You need to start putting out more details -- there is a question here -- you need to start putting out more details on your exposure especially a listing of your HELOCs, closed-end second deals, including payoffs, performance et cetera, similar inner CDO detail on your ABS CDOs that you provided on your CDO squared deals, sensitivities et cetera. Why haven't you done so?

Thank you for that question. We have been getting it a lot. I've talked to a lot of you about this over the recent past. We hear the feedback. We are planning now to enhance disclosures on our website, particularly with respect to our CDO portfolio and our other structured finance exposures just in response to the voluminous number of requests that we have received. We will show all of the collateral makeup for all of our CDO's, including those that are outside of the multisector CDO book of business.

And when you -- in fact, when you look at those transactions outside the multisector portfolio see things like the transactions that are investment-grade corporate portfolio that had allocations of RMBS and ABS CDO collateral, where we've disclosed that we have refined the mark-to- market process with respect to them, as well as the amounts of RMBS that are resident in other transactions, including in some of the CMBS.

So we are intending to provide more detail on all of these exposures than we have to date and you should expect to see us to do so in the near future.

Okay, Mitch, back to you. Could you please provide additional commentary on your prime second lien exposure and the $100 million special addition to the unallocated loss reserves? Specifically what is the total size of the insured prime second lien book? What is the vintage breakdown of this book and what is your internal credit rating of this exposure, what is the breakout of fixed versus floating-rate?

Some of that is in the deck and I covered, but essentially our second lien exposure consists of closed-end seconds with a net par exposure of approximately $10.5 billion as of December 3l, and a net par HELOC exposure of approximately $11 billion. On a combined basis, 40% were issued insured in 2007, 37.7% in 2006, 11.9% in 2005, 6% in 2004 and 4.4% in 2003 and prior. Please note also that we did not insure any closed-end second transactions in 2005.

Generally speaking, the attachment point for these transactions are at the BBB level, and our internal ratings would be similar to those of the rating agencies with the exceptions of the deals that we took a reserve on. The home equity transaction (technical difficulty) variable-rate tranches, one or two off of one month LIBOR. But the closed-end second deals vary. All transactions have a net funds cap, the rating agencies do not contemplate basis risk in their ratings. Moreover, the policies do not cover basis risk shortfalls. We are continuing to actively monitor the portfolio and as a result of our monitoring we were able to arrive at and take the reserves of $614 million for 14 transactions. We've noted similar trends amongst other deals but they are too new at this stage to were a loss is probable and estimable; we are continuing to vigilantly monitor them.

And the unallocated reserve that was referred to in the question is for potential issues related to these deals. Note that the $100 million is in addition to the unallocated reserves. Those reserves by their nature would be utilized for whatever deals in any sector would require but obviously given the mortgage market it could be utilized there if further deterioration occurred there and we had that in mind.

Chuck, can MBIA be forced into bankruptcy?

The short answer to that is, no. Insurance companies that become insolvent actually go into a status called I think in New York, rehabilitation, in which case the operations of the company are taken over by the superintendent of insurance. So from a strictly legal perspective that is what we are, that is what an insolvent insurer would be dealing with.

From an economic perspective I think the answer there is there is no event on the horizon that anyone can foresee that would result in MBIA being insolvent either the highly liquid and capital adequate insurance company or at the holding company which has substantial liquid assets against its obligation. So it is virtually impossible to imagine a circumstance in which MBIA would become insolvent and then go into a rehabilitation status in New York.

Cliff, you haven't gone overlooked completely. Can the insurance company seize any of the assets affiliated with the asset liability management programs if the insurance company needs to meet liquidity demands?

As I mentioned earlier, the asset liability businesses are held at the holding company level and so the assets are held by the whole count. If those assets are actually pledged to the insurance company against the obligations that it is insuring for the investment agreements and the global funding MTMs. So if the insurance company needed to pay a claim on the insured MTMs or the investment agreements, it could sell those assets, use those proceeds to satisfy the claims for those obligations.

Mitch, how does MBIA view the open source model published yesterday indicating $12 billion US in losses expected for MBIA, and how does that model compare to the company's own loss estimates? What are the key differences?

Let me respond to that, and Chuck you may want to add something as well. Pershing states in their model that it is meant to provide greater transparency to the market. In fact, the model is more or less a black box driven by undisclosed loss assumptions derived from an anonymous global banks proprietary trading desk. The extreme assumptions in the model produce the desired effect of a sensational headline loss number for the firms evaluated. They also state that the model is detailed collateral analysis, and while it actually uses averages and simplified macro loss assumptions about certain product types and vintages, this is distinctly in contrast to our approach which has been a detailed loan level modeling exercise which we feel more accurately looks at the characteristics of each individual piece of RMBS and the individual loans backing them.

The model is purported to be a more accurate representation of the risks but in fact the model does not factor in the actual deal structures or any of the ABS, CDO and HELOC and closed-end second exposures. And so for example on the ABS CDO modeling side the Pershing model or the global bank model as the case may be, does not accurately account for the actual cash diversion mechanisms within the deals or the type and timing of required payments. Both of those will have a or could have a material impact on projected performance.

Chuck, you want to add to that?

Only that this is a letter that was distributed yesterday. We have not completed our detailed review of it, but it is important to point out that it is a letter demanding transparency where all of the analytical work was done by an anonymous so-called global bank that doesn't wish to be identified with the work. And the work which is disclaimed by the author who says that he can't vouch for the accuracy or the completeness of the analysis. So I mean we are going to go through it and determine the extent to which there are reasonable points to discuss in it, add, but there are I think some flaws in the way it has been presented.

Back you, Cliff. Regarding Ackman's comments about your GIC spreads being too wide for safe investments, don't you also need to consider MBIA's cost of funds for the GIC contract rates, as well?

Sure, I think those mathematics certainly were a little bit of a stretch. That is exactly right. You have to consider not only the asset spread that we are buying on behalf of the portfolios, but also the liability spread, because that is how you get your net spread in terms of the calculation.

Without going too far back to where we were earlier today, we try to optimize that liability cost. Historically, we have been a sub LIBOR funder. So we start with positive spreads in any asset we buy at LIBOR or above LIBOR. That is certainly a big part of it.

The other piece missing is that we also include the investment return on the capital that we hold within the business. That is the full coupon. There is no spread there. That is our capital account, and that generates earnings. That goes into the income statement, as well.

And then third, you have to consider the time comparisons. I believe the comparison that I'd given was for some generic index spread. I think it was a AA index spread at some snapshot in time. Our book has been built over the last 15 years. It includes assets that have been bought at tight spread times, average spread times and widespread times. So it is just not accurate to compare this book, the book yield of this book to that snapshot in time.

So for those three reasons, that analysis just doesn't work.

Minal Mehta of Pallatine Partners asks, based on MBIA's current CDS spread, the credit markets are pricing in a liquidity event or regulator intervention that is going to cause an imminent default. Can you please very clearly and concisely state your position on this? Under what scenario would MBIA file for bankruptcy?

There is no scenario that we can identify that would result in MBIA becoming insolvent, having a liquidity event or being intervened with by the regulators and experiencing a default of any kind.

Okay, Mitch. What about your risk profile on the CDOs? Isn't that more problematic for you?

Our overall business strategy is to participate in the most senior layer of the CDO capital structure while creating a balanced book of business across multiple underlying asset classes, including investment-grade corporates, high yield loans, ABS, RMBS, CMBS and emerging markets. Post 1999, MBIA focused on insuring first, funded CDOs having minimal AA shadow ratings by both Moody's and S&P, although most all funded CDOs done by MBIA in the last five years have been at a minimum AAA level.

And second, synthetic CDOs at the super AAA level by virtue of a rated AAA tranche subordinate to MBIA or by virtue of an attachment point that is a multiple of the AAA requirement imposed by the rating agencies. In all cases, MBIA cannot be accelerated against, and we maintain the right as I said before, as controlling party with our deals, to accelerate at our sole discretion.

Acceleration is an additional cash diversion remedy for us, which redirects cash away from the subordinate tranches and funnels it to accelerate amortization of our senior exposure. And again, acceleration is distinct from liquidation of the collateral pool which we also direct upon certain events of the pool as sole controlling party within our deals. The risk is in the performance and the market, but not in our position.

This question is on loss coverage. What is your loss coverage on the HELOCs and closed-end seconds?

The loss coverage varied across the transactions, but we can generally say that the transactions were sized to cover losses in the 5% to 11% range. Weighted average FICO scores in our '06 and '07 HELOCs were 706 and 702, respectively. Our weighted average FICO for our closed-end second borrowers in '06 and '07 were 719 and 710, respectively.

Clearly very prime in appearance, and with regard to our closed-end second portfolio, not what one would expect for a CDS transaction. Our current reserve list is comprised of 12 HELOCs and 2 closed-end second deals. The common theme amongst those transactions are high initial delinquencies where only a small percentage of the loans roll back to current status. The high role rates for the severely delinquent buckets and ultimate charge-offs by the issuer have severely restricted the ability of the credit enhancement mechanism in these deals to cover current period losses.

Accordingly, we are seeing a front-loaded loss curve -- it would be a hockey stick in appearance -- that eliminates current enhancement levels. Our estimates are that these levels will eventually subside, but the timing will vary and could be as long as 24 months to return to a state that is closer to expectations.

Thank you, Mitch. We have several questions that deal with more specific requests about details of exposure on our deals. Chuck, rather than read them off specifically, could you just remind everybody what our intention is for prospective disclosure on our portfolio?

Sure. Just to reiterate the comment that I made a few minutes ago, we are intending to provide enhanced disclosure with respect to our structured finance portfolio, particularly around CDOs. We are going to provide the content, the collateral content of the CDO portfolio in more detail than we have provided on the website to date with respect to the multisector portfolio.

We are also going to provide collateral information about the transactions that are not in the multisector portfolio. Again, multisector is $30 billion of our $130 billion CMBS pool and CDO portfolio that we talk about in our supplement. And we are going to try to provide the same level of detail with respect to all of them so that it is quite clear what their collateral makeups are.

I've talked about this with our counsel, and they have asked that we make sure to note that there are -- our RMBS securities in transactions that are outside of the multisector CDO portfolio. You know, US RMBS is one of the biggest capital markets in the world. There aren't very many fixed income pools of anything that don't contain some allocation of this asset class, and we are going to provide full detail of that on our website so that you can see where it resides in every transaction.

We're going to stick with you, Chuck, for a few more questions. How would you characterize the developments with the rating agencies over the last two to three weeks?

I don't know about the last two to three weeks, but where -- my own view -- now, you asked for my characterization -- is that the rating agencies over the last six or seven months have been struggling to keep up with the dynamic changes that they observe in the housing and mortgage markets and their effects on the securities that they rated and the bond insurance companies that they have rated. And in that regard, the rating agencies are in the same boat of embarrassment with the monolines, the banks, the investment banks, the regulators, the Fed, the Treasury, anyone else that you would name.

There are very few market participants of any kind who correctly understood and identified bad losses on the subprime collateral that we're focused on today, would go from kind of 8% to 10% at midyear to 18% to 20% at year-end, and call into question transaction structures that easily surmount the kinds of stress that we were forecasting earlier in the year.

So the agencies have been really, really struggling to catch up and to stay on top of this sort of moving -- this moving target. Now, in the last two to three weeks we have seen quite a few rating agency actions. Fitch has been quite clear from day one or from December 17th, which seems like day one, that their focus was on assessing the capital requirements associated with each of these companies' portfolios and having them meet or not meet the capital requirement. The companies that met the capital requirements including MBIA are seeing the results that their ratings are affirmed and stable.

Those companies that have not met the capital requirement and are now capitalized at a level in Fitch's eyes below AAA are having their ratings adjusted.

S&P also has been pretty clear in that they said from day one that they kind of expect these AAA-rated companies to respond to the capital challenge by producing adequate capitalization at AAA levels which MBIA has done, but that they are concerned. Their negative outlook on the companies that have exposure to the housing and mortgage markets is more related to how bad could the housing and mortgage markets get. And they have been pretty clear in that, and I would kind of expect that that is a multi-month process before the companies are able to resolve -- to resolve those ratings.

With respect to Moody's, Moody's frankly has been less transparent with the market about what the capital requirements were. And who knows, maybe that's appropriate because we all recognize that's a little bit of a moving target. And I could tell you that has caused some frustration on the part of many participants. At this point, we are committed to working with Moody's through both the reassessment of capital charges that they are thinking about now, as well as the industrywide review that they have embarked upon where they are looking at the long-term health of the bond insurance industry.

And we are expecting at the end of the process that MBIA is restored to a AAA affirmed and stable position. I don't see how anyone could mistake the actions that MBIA has taken over the past two months. This is a company that is determined to maintain a differentiated position relative to capital and credit quality in this industry, regardless of how the rating agency is ultimately sourced out.

Very closely related to that, there's another question here. There is a lot of confusion being traded by the rating agencies, especially Moody's the other day. S&P has been good about providing numbers. Moody's throws you into the same bath water as Ambac, and they have organizational and capital problems.

We see a sharp contrast between you and Ambac. Is there anything more that you would like to add to that?

Again, MBIA has been, we believe, more proactive than any participant in this industry in identifying and rectifying the capital issues that arose from the fact that we and many of us had exposures to the housing and mortgage market that we are going to need to be reassessed. So frankly, we think that there is a differentiation between MBIA and most of our industry in that regard; that we have been proactive about managing capital in a conservative way because of our desire to differentiate ourselves in terms of capital position, conservatism, going forward.

Okay. One more for you, Chuck. What is the difference between Fitch and Moody's current capital requirements?

Again, Fitch has actually published its capital requirements back in December, and Moody's has not. So I can't comment on that.

Cliff, we have one for you. Does the insurance policy on the global funding program have the same status as the other insurance contracts issued by MBIA Insurance Corp.? And is MBIA, Inc. the sole owner of MBIA Asset Management, LLC?

Sure. Actually, there were several questions asked about the MBIA Global Funding structure. So here's a chance to clear that up. The basic structure is such that MBIA Global Funding issues debt and lends those proceeds to MBIA. Inc. That is where those proceeds are invested and assets for the asset liability product segments.

These assets are pledged to the Insurance Corp., as I mentioned before, in case of an MBIA, Inc. default on an investment agreement or an MTM debt service payment. The treatment for a global funding debtholder is similar and pari passu to every other policy issued. That is the GFL or global funding debtholder doesn't have a secured interest in the assets. However, it would be treated pari passu, again with the other Insurance Corp. policyholders.

The second part of that question, yes, MBIA, Inc. is the sole owner of MBIA Asset Management, LLC.

Okay, Chuck. Would the ratings of MBIA insured paper need to be reset at the lower rating levels of MBIA if MBIA is downgraded?

If MBIA is downgraded, it is likely that bonds that we've wrapped that are rated lower than we are, are downgraded. Bonds that are rated AAA on their own -- and there are quite a number of them in our portfolio -- probably would not be downgraded, would be my expectation. But the others most likely would be downgraded.

Another one for you, Cliff. Does MBIA Insurance Corp. have access to pledge funds under the global funding program?

Sure. I think, Greg, I covered that a couple questions back. Those assets, just to restate it, those assets are pledged to the insurance company against those obligations for the investment agreements and the MTMs. And again, if the insurance company needed to pay the claims for billable funding or the investment agreements, it could take those assets, sell those as against to pay the claims on the IAs and the MTMs.

Chuck, a few more for you. What's the status of the reinsurance transaction that you referenced back on January 9, 2008? Is there still reinsurance capacity available to you?

Yes, there is. We are continuing to work on developing a reinsurance transaction that has the characteristics that we talked about in the context of capital plan, one that would cover a diversified portfolio of transactions in our book, both those that are low-capital-attracting transactions, as well as those that have more substantial capital associated with them.

And the object is to try to come up with a deal that we think is cost-effective. Frankly, the fact that we don't need the reinsurance transaction to meet or exceed the rating agencies' stated requirements at AAA should help us in terms of getting good pricing on them. If you look at -- as we talked about reinsurance back in November/December timeframe, we were looking at providing ceding business that was very, very safe and paying equity-like rates for it. And that is something that I think was not in the cards. So we are getting closer.

Okay. How much of MBIA's insured par and deferred revenues are from providing reinsurance to other primary financial guarantors?

Good question. The primary financial guarantor to whom we've provided reinsurance is Ambac, and the amount of par involves about $5 billion or $6 billion. I don't actually have the amount of deferred revenue that is associated with -- those are older transactions.

We also have really a tiny amount of reinsurance with a Assured, but the dollar amounts are not material.

David Roberts of Angelo, Gordon & Co. asks, can you disclose how your internal estimates of loss is compared to the latest S&P stressed after-tax losses of $3,520,000,000?

We have done our own internal estimate of stress loss for the purpose of, obviously, for insuring that we had adequate capital to cover those stress losses, but also to validate the work that the rating agencies have done. And the results of our internal stress would suggest that when we raise capital to meet the rating agency requirement, that we have more than adequately met all economic requirements.

Cliff, for AAA-1, liquidity will not be an issue because of the backstop liquidity facility. For Meridian and Global Funding, should either units be unable to sell certain positions at desirable prices due to the current dislocation of the credit markets, what other methods would be available for you to meet these obligations?

Sure, and AAA-1 is right, liquidity backstopped, as I mentioned earlier. For Meridian, as I mentioned earlier, it is actually a match funded program, and so there is no need as it were to sell assets to satisfy the liabilities as a straight pass-through structure.

And then in terms of the asset liability product segment, I went through earlier that that is actually run on a programmatic basis. There is multiple sources of liquidity available to the ALM programs. I mentioned some of them; cash flows from the assets obviously the primary driver, but it is a highly liquid portfolio. It is repo-able, certainly salable. So there are multiple ways to generate liquidity out of the ALM book.

Another one for you, Cliff. This one is Geoff Dunn at KBW. How are the expenses of the investment management business paid? Are they paid by the asset management subsidiary or the holding company?

Sure. Basically, the asset management businesses are held by Inc., and so -- although there are subsidiaries underneath, again, they are all held by Inc. So each subsidiary is responsible for its expenses, but it also is generating its earnings. And you can see that in the segment reporting in the Qs and the Ks, but at the end of the day it is all under that Inc. umbrella, but driven by the asset liability at sub -- companies underneath the holding company.

Cliff, we're going to stick with you. This one from Bill Ackman at Pershing Square. We understand that MBIA has been redeeming investors in Global Funding who have requested early redemptions at a discount. What is the total amount of such redemption requests MBIA has received? Did MBIA book any gains on these transactions?

Sure. We do provide a little bit of liquidity to the market for those purposes, but it has been pretty small. I think the number has been somewhere around 150, $160 million through the second half of 2007. And the gain figures somewhere on the order of, I think, $12 million which we've recorded into the income statement of the investment management segment.

And Bill Ackman has another one for you. What is the total amount of redemption requests received by MBIA relating to its municipal or nonmunicipal GIC business? How much of the GIC business relates to structured finance or CDOs, including credit enhancement to credit linked notes, ABS, CDO and/or other structures?

There is no outs on the GIC or the investment agreement business. So there have been no redemptions within that business. In terms of the other components of the ABS/CDO market, there is a market for GICs within the ABS/CDO arena. We have chosen to play that very, very carefully. We have about 3% of the overall liability portfolio in that segment. I think somewhere on the order of about $500 million attaching at the investment grade, at typically very high investment grade space and floating rate.

Chuck, back to you. This one again from Minal Mehta of Pallaton Partners. Egan-Jones has estimated that it would cost upwards of $200 billion to recapitalize the monoline insurance industry to maintain AAA ratings. Dinallo's plan calls for $15 billion. Both of these numbers seem extremely high relative to the size of losses that you ultimately expect.

Where do these numbers come from, and who is defending the industry's position in these discussions? If you believe in your position, obviously you guys need to do better PR as the public debate has gotten out of hand from this standpoint.

Well, there is a lot of material there. Let me just try to take them one at a time. With respect to Egan-Jones, they have not shared with us the analysis that they have done that leads to their $200 billion number. There is -- as you point out, there is absolutely nothing that we have seen that would suggest that anything like that is required at the industry level. Of course, we can speak most appropriately and most directly about MBIA, and we've talked about that a bit today.

We think that the capital raise that we are doing which is north of $2 billion is adequate for us to maintain AAA ratings based on our current outlook on the economy. Now, could that change? It sure could because the economy could be worse than anybody expects. On the other hand, it could also be better than anybody expects.

So I just don't -- we don't have any basis for coming up with any number, other than that which we have been working with and have discussed and capitalized against with the rating agencies.

With respect to New York State, Gary said it earlier, that we can't speculate as to how the state is coming up with its estimates of need nor its negotiations with counterparts to participate in an industry solution. Some of the concepts that people have talked about are excess of loss type contracts as opposed to direct equity infusion. And it is a little hard to calibrate the capital need that comes from direct download of capital into the entity versus excess of loss type coverage. So maybe that had something to do with it.

MBIA is taking our position with respect to our franchise, our capital plan, the risks in our book of business to all constituents; to you, to the regulators, to the rating agencies, to the press. Frankly, a year or so ago, we would have been very reluctant to be as assertive as we have been with respect to communications. That has changed. And we kind of agree with the comment that we do need to have a more assertive stance with respect to making sure that misperceptions about our company are rebutted, rebutted effectively and timely, and that we get the affirmative message about our business model and our business prospects out into the public. So this is a part of doing that.

Gary, this is some questions for you from Gary Ransom at Fox-Pitt. A series of questions -- these are a series of questions on US muni bond business. When you say -- in your press release, I presume -- reduced demand for the product in the second half of December for US public finance, can you elaborate on that? Was this just broad concerns across the market? Was the spread benefit available from MBIA too small?

I understand from bond traders that wrapped muni bonds in the market currently give little or no value to the wrap, i.e. they already trade at the underlying credit rating. Does this mean financial benefit to the issuer has been diminishing from a wrap? If so, can other competitors, FSA, AGO, potentially Berkshire, offer more value? When do you think that might change?

Wow. I'll say it's a series of questions. Reduced demand for the product in the second half of December coincided with the rating agencies' actions in terms of negative outlook and CreditWatch negative, and the uncertainty associated with that magnified by the press, if you will. So a lot of issuers postponed their issuance into the new year rather than go into a market that was a bit unstable.

And I don't have the penetration numbers in front of me, but a typical insurance penetration number would be in the 50% range, and I think the last half of December was probably in the 30% range. So you can see that that has fallen off.

In the new year, I guess I would say that there is tiering of the monolines. There are those that are in the main house, there are those that are in the doghouse, and there are those that are in the outhouse. And the ones that are in the main house are getting more than their fair share of the business because they don't have the taint or the immediate worry of being downgraded by the rating agencies.

We believe we are in the doghouse. We are earning our way back and we are recapitalizing ourselves. We are maintaining our franchise value. We are doing a modest amount of business as we alluded to earlier in this conversation.

And then there may be others whose name I won't mention, of course, who are in the outhouse when they have got downgrades recently. So that is playing into competitive spreads and the ability to win business. This is why our capital management program, our capital raising program is so important to us. The sooner that we can get it finished, the sooner that we can build redundant capital, capital cushion, the sooner that we can move back into the main house, if you will, and compete with those who are untainted.

We just want to go back and clarify an earlier statement that we made with respect to the New York State Insurance Department's comments to take over -- their ability to take over MBIA. The Insurance Department can put companies into rehabilitation even if a company is not insolvent for various reasons, including if the company is found to have violated law or regulatory orders or if they are concerned about the company's ability to pay its claims.

Now back to the questions. Please comment on yesterday's Ackman letter specifically with respect to whether current SEC disclosure requirements would permit a rights offering, given alleged undisclosed losses in the companies portfolio.

What the SEC requires is that we make a full disclosure of all material information needed to make an investment decision in an offering. And that is exactly what we would intend to do. There are no undisclosed losses in our portfolio. We have discussed today our expectation with respect to loss in our RMBS portfolio, as well as in a handful of CDO squared. Those are the expected losses in our book of business today.

One more for you, Chuck. Regarding your MTM hits, how much runs off from the deals contributing to the mark?

I don't have a detailed runoff analysis of those transactions, but the average life of the deals that are subject to FAS 133 is about between six and eight years, and they run off pretty much in a straight line fashion. So you could say that if nothing else changed, our mark-to-market would reverse over six or seven 7 years.

However, everything is going to change, and yesterday we did see some downgrade actions on S&P's part. That will likely have an impact on the mark, and then spreads are going to change. I don't know whether they will be higher or lower, but they will be different. And as a result, it is very difficult for make any kind of a forecast with respect to the mark. But just with respect to average life, you're talking about six to eight years.

Mitch, Jay Colby from Van Eck. How many municipal bond defaults have actually forced the Company to pay some or all of interest and/or principal?

Not many. I think we also need to distinguish between paying versus loss. There may be instances which will still be fairly rare, given the size of the muni book historically and even currently, where on a near-term basis you may have a liquidity claim that has to be paid. An example would be after a significant event like Hurricane Katrina where we actually had to pay a small amount of claims because of the disruption to the banking system that took place in Louisiana and specifically New Orleans after Katrina. However, all of those were reimbursed to us.

So we then have to separate out those where you get reimbursement from those where we actually pay claims and suffer loss. And in the muni side, that is a very small number, probably under a dozen, where net of reimbursement and net of reinsurance you actually wind up with a loss.

Gary, a question for you. To what extent has MBIA been involved in the discussions with the New York State Insurance Department on the capital plan with the banks?

MBIA has maintained frequent communications with the Department, but we have not been party to the discussions that the Department has had with the banks.

Another one for you, Gary. I am surprised that there hasn't been more share purchasing from MBIA insiders. Why not?

In conjunction with the Warburg Pincus investment agreement, the MBIA senior management team has committed to purchase $2 million collectively worth of MBIA stock at a price of $31 a share. But to get a full lay of the land, the senior team gets at least half and in many cases more than half of their total compensation in every given year in stock, either in stock options or performance-based restricted stock. And they have since I have been here with the Company for ten years.

So they have built up a huge amount of equity in the Company, if you will, almost all of which -- I think not almost all of which -- all which is under water. So they have clearly watched their fortunes rise and fall; hopefully rise again with the Company. So we feel that the shareholder interests are very much in line with management's interests. And at this point in the cycle, to make them buy more with years and years of equity participation under water would not be appropriate.

Chuck, how does MBIA plan to balance trying to grow versus generating more excess capital to protect against additional adverse rating agency movements?

Unfortunately, at the moment that is not a dilemma that we face. Our business is actually growing slowly at this time, and the amount of business that we've been able to do in the past several weeks has not been satisfying relative to the potential of our business model. And so what we are doing right now is generating capital from operations, and generating it in a rather robust manner.

Longer-term, our expectation is that we have such a strong capital cushion that we differentiate MBIA in the minds of investors and issuers, that we have resolved some of the credibility issues that affect MBIA and the industry generally, and that we do start to write to business more robustly in an environment in which the pricing for financial guaranty is quite attractive.

So we are expecting and hoping that over time we have to work harder to achieve that balance. It quite frankly is not a problem for us at the moment.

Another one for you, Chuck. One of the ideas that has been theorized is that the regulator will insist on splitting your municipal bond and structured finance businesses, and would do so using a good bank/bad bank structure. The bad bank, i.e. structured credit, would be put into runoff and the municipal bond business would continue as a going concern.

I know you don't view structured credit as bad, but given the political hoopla around how structured finance has tainted a good municipal bond business, the regulator might try to pursue this route. What avenue would you -- what avenue would he be able to pursue to create a good bank/bad bank structure? How would this affect shareholders?

Those are really good questions. There are a lot of hurdles to creating a good bank/bad bank structure with a regulated and highly-rated insurer. And I know that some of the solutions that have been discussed that people are sort of kicking around in the public actually would not meet the rating agencies' approval in terms of preserving the ratings even of the ongoing entity. So it is one about which you've got to be quite careful.

It is possible and it has been done that there have been insurance securitizations that result in the ring fencing of a part of a business that isolates it, to some extent, from an ongoing business. But I think it would be, frankly, quite challenging in this environment.

We are very interested in having that dialogue with the state as well as any other market participants, because we don't want to turn any potentially valuable idea away. But it is one that has a lot of hair on it.

And just to pipe in for a minute, there are, at least theoretically, other alternatives that we've been brainstorming ourselves that would achieve the goal without the cost, the time, the expense and the uncertainty associated with the good bank/bad bank. So we do look forward to dialoguing with the Department and its advisors in the near future.

Chuck, I know you addressed this earlier, but we've had some requests for clarification if you could just reiterate the comments. Please provide general guidance on the other steps to raise equity as referenced in the section entitled Capital Plan in your press release.

Again, we have Warburg Pincus' commitment to backstop a rights offering. We are considering alternatives that would also involve backstop equity raises, but frankly beyond that, I cannot go at this time.

Okay, we will stick with you, Chuck. Can you comment on the latest S&P 500 ratings review on RMBS deals, and if S&P have advised if this will trigger another round of FT rating reviews.

On January 15th, S&P announced that it was revising its assumptions for their recent vintage RMBS and CDOs backed by RMBS. In particular, they increased their assumption for a cumulative loss on the 2006 vintage subprimes to about 19% from 14%. Now, after that announcement they reran the financial guarantors through their subprime stress model that included the impact of these assumptions. And concluded and issued a press release to this effect, that even with the increased assumptions, MBIA's previously announced capital plan is sufficient to absorb the additional requirements.

And by the way, all of the data that I've presented today about capital cushions and such do reflect S&P's revised view of those RMBS. So we believe that yesterday's rating changes on the referenced securities are just the securities level implementation of the change in outlook that has already been implemented with respect to the monoline capital model.

Scott Frost from HSBC asks, have you obtained a waiver or amendment of your net worth covenant from the bank group? You mentioned you were seeking to obtain one in your prerelease.

Yes, we did -- and I think I addressed this earlier -- we did get an agreement with our banks to modify the covenant calculation so that the surplus notes are treated as debt rather than equity. That insures that we remain in compliance with that covenant through the issuance of the surplus notes, and we have full access to that facility at this point.

I think that is debt rather than equity.

Oh, I'm sorry, forgive me. Right, the purpose of the amendment was to treat the surplus notes as equity rather than debt.

When will MBIA utilize its put to the funded trust to raise up to $400 million in cash in a return for preferred stock; talking about the ARPS facility?

There is no need for us to do that, and so there is no scenario in which we would expect to exercise the put. That facility, because of the fact that it is funded, receives 100% capital credit in the rating agency capital model. So exercising the put really is a liquidity management tool, as opposed to a capital management tool. The capital management tool we have already exercised.

Does additional collateral posting reduce your statutory surplus in any way?

Let's see, we don't have any collateral posting requirements with respect to the liabilities that we write in the insurance company that would affect statutory surplus. So the collateral posting requirements that we talked about earlier, that actually Cliff talked about, are in the asset liability management portfolio. The assets and the liabilities are sitting at the holding company. So there is no impact on statutory surplus of posting collateral.

[Jeff Powell] of Bedrock Capital Management asks, can you tell me why MBIA is looking at ways to raise equity in addition to the $2 billion plus already raised? Is this primarily for ratings, i.e. Moody's satisfaction, or is there more fear of future claims from MBIA?

There is actually nothing that we can identify now that requires that we do anything in addition to what we have discussed. Again, we are going to have pro forma year-end '07, 750 to $1 billion of excess capital relative to rating agencies' stated requirement. Because of what I said a few minutes ago, that does grow each quarter, so we think that we actually have pretty good running room.

And again, we are in fact considering alternatives to the rights offering that we have discussed. But I've already said everything that I can say about it.

Gary Ransom of Fox-Pitt asks, how do you think the downgrade by Fitch of some of your competitors will (technical difficulty) the market?

I think any downgrade of the most significant companies in our industry is going to have an impact on the entire industry, and it is just another part of the process that the industry has got to go through to rebuild not only its capital base but also its credibility with investors; is that the leading companies have got to return to AAA affirmed stable. So the point is that the downgrade by Fitch's, some of the major companies make that job harder.

Gary has another question. The statement in the press release regarding Warburg, we are considering the rights offer and other options. This makes it sound like the rights offering could be replaced by something else. Am I reading too much into that?

Unfortunately, I can't say anything about the equity, other than what I have already said.

One more from Gary Ransom. What prompted you to change the income statement format? Do you expect to eliminate the old version eventually, so we should change our models now?

The answer to that is we are changing the income statement because it is best -- it is closer -- it is best practices from the standpoint of compliance with GAAP requirements for consolidated financials that your income statement be presented on a consolidated basis. That doesn't mean that we are not going to provide segment information, because that is quite important.

There actually is a requirement in the literature for segment basis financial information, which we do provide in a segment footnote. And I would expect that we are going to continue to provide the same kind of segment information that we provide today. It is just that the face of the income statement that you see when you open up the 10-K will present the consolidated view first.

This one it looks like we've touched on before. Geoff Dunn asks it from KBW. Do you have any debt covenants that pose any additional liquidity or operating risk to the Company should you be downgraded by the rating agencies?

Under what circumstances might your debt covenants interfere with your ability to conduct business and/or satisfy any of your payment obligations?

Other than the debt covenants that I covered in my prepared remarks in our bank facility, we don't have any other debt covenants in corporate obligations. Cliff covered earlier the impact of downgrades on our investment agreement business with our collateral requirements and ultimately termination rights on the parts of the counterparts. And we have, we believe, more than adequate assets to cover those obligations.

Please describe the holding company investments in the $433 million figure in detail. Are these investments in publicly traded securities, or are they private investments in subsidiaries, affiliates and other? And this is a question from Bill Ackman at Pershing Square.

Yes, the holding company assets, $434 million at year end, consists of 60% treasuries and money market securities, and about 40% are public high-grade corporate bonds.

Another question from Bill Ackman at Pershing Square. The rating agencies have assumed in their models that the full $1 billion from Warburg Pincus will be downstreamed to the insurance subsidiary. Have you committed to this?

In fact, we received $500 million yesterday from Warburg Pincus at the closing of the first leg of their commitment, and that $500 million is in the insurance company. The purpose of the equity raised is to provide a surplus to the insurance company, so you should expect that all of the proceeds end up there as they are received.

[Tim Mullen] from VNB Trust asks, would it be possible to set up something along the lines of a good bank\bad bank separation? We've answered this before -- let me just see. We've covered that question, Tim.

It's possible, but very difficult.

Mitch, this one is for you from Bill Ackman. Please describe in detail all of your below investment-grade exposure by name of obligor, gross and net exposure and outstanding, S&P, Fitch, Moody's, etc., and in default breach of covenant, etc.

The first thing I would do is I would say that the operating supplement is a good place to start, in that it lists the top 10 below investment-grade credits and provides some good detail on that. And that is on an S&P priority basis, so you have an understanding of how exactly that works.

We don't provide the details on the balance of the below investment-grade exposures nor on other exposures related to the caution or classified list for a variety of reasons, some of which are confidentialities related to the credit that are involved.

The next questions, it's the same question but for the classified list distinguishing from the (inaudible).

Same answer.

Same answer, right. From the operating supplement, one can determine that $33 billion of CDOs has been reinsured as of 12-31-07. Please identify these CDOs and describe them in detail. Please identify the reinsurers who have reinsured these exposures. And we said earlier -- Chuck said earlier that we would be putting out a listing of all of our CDO details, so that has been covered as well.

Mike Grasher from Piper Jaffray asks, given the triggers protections you have in place on your RBS and CDO deals, can you quantify your own maximum loss expectation? It is understood your maximum loss is your exposure, but realistically making some dire assumptions, what could we expect?

I suppose if we take the Short's analysis, it would look like expectations are 6.6 billion on $30 billion of exposure.

Here, I think we have to understand that the best we can do is to take the loss reserving numbers that we have where we've been able to really stress the book, where we've been really able to run the models with a variety of assumptions, some of which I mentioned during the presentation, and come up with numbers that based on what we are seeing right now, we're comfortable with.

As we all know, any model is as good or as bad as the assumptions that are in it. And while it is very easy to take broad-based numbers and put them onto entire portfolios, the methodology that we use because we are close to the deals, because we are consistently getting information from issuers, servicers and trustees, permits us to have a very granular approach to the deals. And therefore, we don't take an overall by sector or book view, but a deal-by-deal view.

So I would say that the best we can do right now, and I think it is a good approach, has been what we have done; which is to take the books where we are seeing stress -- we talked about those earlier, what they are -- and we've come up with the numbers that we think represent a probable and estimable loss on a go-forward basis, based on the economic conditions we see and based on the performance of the book.

Could some of those change as time goes on? Yes. If someone can have a clear crystal ball as to exactly what the economy is going to do and what precisely will happen with HPA and otherwise, that's fine. What we've done is we have taken very conservative assumptions. We've not given any credit for recent rate cuts, economic stimulus package, increases in Freddie and Fannie Mae limits. We haven't taken any of that into account, and now I've got what we've assumed a depressed real estate market going after at least the next two years.

So we're comfortable with what we have, and we will update them as we go forward, but we believe that's the right approach to take.

Another one for you, Mitch. One of the major reasons for the variation of your CDO loss estimates compared to Ackman's? We already answered that one.

These are ones that have just come in during the broadcast, so it is going to be a little trickier to keep track of these.

MBIA should purchase reinsurance on its municipal book of business. This has been reported as an avenue of potential capital relief. Can you give me a sense of the economic effects of reinsuring this book of business?

This has been discussed. We actually think that you don't get much capital relief bang for the reinsurance buck by going this direction. It is the reason that we are looking at doing a transaction that is more of a diversified pool of deals in our portfolio.

Is the derivative asset the amount of mark-to-market losses recoverable from reinsurance?

The derivative asset on the balance sheet just represents the positive mark-to-market on all derivatives where we're a net receiver, and largely would not be the insured credit derivative.

What portion of the derivative asset is associated with reinsurance from companies that are on watch to be downgraded below AAA?

Again, no portion of the derivative asset is associated with reinsurance, so I'm not sure how to answer that. We've talked about our reinsurers and the amount of the portfolio that they cover. And while we haven't gone through in detail on their rating status, I think that I have acknowledged that Channel Re, our largest reinsurer, is on review for downgraded at Moody's. Our next largest reinsurer is probably RAM Re, which is a negative outlook from S&P, but it is stable with Moody's. And as for the smaller ones, I just don't have a good read at this point.

Here is a question that we've answered many, many times, both here today and in prior occasions. But since it's being asked again, we will answer it again. Do any insurance contracts, structured or CDS or otherwise, that you have written require you to post collateral in the event of downgrades?

No.

Thank you. Based on your current expectations for ADP in 2008, how much incremental capital do you expect will be freed up during 2008, assuming no further capital charges on the CDO or direct RMBS portfolios beyond that currently assumed by the rating agencies?

If we wrote no business, we would free up a little over $1 billion in capital per year. And to be frank, we have not finalized a plan for 2008 at this juncture, because of the fact that the market has just been so uncertain. And then, frankly, if we did, we might not provide disclosure of it because we normally don't talk about plans.

But suffice it to say that given where we are right now in the first quarter, I do anticipate that there is a meaningful increment to our capital position from capital requirement that rolls off in Q1.

If for some reason the proxy for the rights offering was not approved in a timely fashion, thus preventing the Company from completing the rights offering prior to March 31, 2008, does Warburg retain the right to walk away and a return of its $500 million equity capital infusion? Are the monies currently escrowed in a separate account?

I would just point out that our agreement with Warburg Pincus is filed and is a matter of public record. So you could probably look some of this up, but there is no proxy that is required for a rights offering, just a prospectus. And MBIA currently has a shelf registration that can be used for that offering. So we don't think there is any real problem of launching and completing a rights offering before March 31, 2008. And even if not, there is no obligation to return Warburg's $500 million capital infusion if the rights offering is not completed. There is no need for those funds to be escrowed. They are now part of the surplus in the insurance company.

Jonathan Adams of Oppenheimer Capital asks, what steps are you taking to reduce operating costs in light of the likely prolonged downturn in new business?

Again, this is kind of a plan issue that, frankly, it is too soon to say. We are doing some redeployment of people within the Company from the production side to the insured portfolio management and risk management areas. So we're trying to flex as best we can, but the dust hasn't settled yet, and so it is too soon to say.

This person is looking for a clarification on the pie chart entitled MBIA wrap over monoline net par $3 billion; wanting to have it explained. Unfortunately, they didn't provide which pie chart that is.

The answer is we have a pie chart that is in the deck that just shows cases where there is an existing bond. The bond is insured by one of the other monolines, and MBIA has provided a wrap over that monoline. So it is the case that -- it was responsive to the question, what would happen to MBIA if any of the other monolines were downgraded?

To the extent that any of them were downgraded, there is the potential anyway for those transactions to attract more capital. However, because of the fact that the total volume is so small at $3 billion, it really doesn't amount to much from a capital requirement. Of course, we don't think there is any material risk of loss. They are investment-grade underlying that are already wrapped by investment-grade monoline insurers.

Steve Stelmach, Friedman, Billings, Ramsey asks, you mentioned that 53% of nonagency RMBS is wrapped -- this is for Cliff, I'm sorry -- and 65% of ABS CDO is wrapped. What is the average rating of the underlying exposures without the wrap?

In the earlier slide, I gave a cut-through for the overall portfolio without giving effect to any of the wraps, and that was still in the AA category. We haven't disclosed the subsector cut-throughs specifically, but I think generally I can say that for those categories you are highlighting, the average ratings under those categories on the cut- through would be investment-grade.

Mitch, Jeff Powell with BMC asks, I see your CDO squared transactions are CDOs or high-grade tranche CDOs. How high? Can you give any color on that?

I tried to cover this somewhat before. Let me go back again. The CDOs of high-grade CDOs are diversified transactions, and they are generally anchored by CLOs which are collateralized loan obligations consisting of investment-grade corporate debt, and contain buckets of other collateral which may include highly-rated tranches of CDOs of ABS collateral. And by that we mean they can go AA; they can be AAA as well.

No one transaction contains more than, as I mentioned before, 38% of CDOs of ABS collateral, as a percentage of the total collateral base. Yields are diversified by the collateral and the vintage, and the underlying collateral ratings as of mid-December remain strong with 70% of the underlying collateral AAA, 17% AA, 8% A, 3% rated BBB, and only 2% below investment-grade.

Brad Davis of Colonial Asset Management. Are there any contingencies in guaranteed exposures? If so, can you please quantify how many and which exposures have contingencies?

I think here what we are getting as is contingencies other than the financial guaranty of our insurance policies, right? So the place where we would have contingencies would be in the asset liability management portfolio, and I think Cliff went through this pretty well earlier. And I would just direct the questioner to the slide that shows the collateral and termination numbers back in the presentation.

Also, is the net par outstanding adjusted for previous mark-to-market write-downs? Can you also clarify the percent of MTM write-downs on multisector CDOs as a percent of your total insured amount?

The net par outstanding adjusted for mark-to-market --.

(multiple speakers) write-downs.

The mark-to-market is a GAAP concept, and you don't actually see net par outstanding anywhere in the financial statements. So there is no adjustment in that sense. The par outstanding that we report in terms of our exposure is also not adjusted for mark-to-market.

Now with respect to multisector CDO, the total mark -- and this is in the presentation -- the total mark for the quarter is $1.8 billion. That sector had a mark also in the third quarter, but it was not the whole $340 million. It is probably, maybe half of it. So when you think about the total mark that we have taken, that is going to be a little over $2 billion or right around $2 billion on that portfolio, and the par outstanding for that portfolio is about $30 billion.

Please also comment on any ongoing or current litigation, investigations and subpoenas.

As we disclosed in our 8-K on January 9th of this year, MBIA has responded to informal inquiries from the SEC and the New York State Insurance Department, and we may receive additional inquiries. We have provided the information requested by the SEC. The situation has not changed and we are not aware of being a target on any SEC probe as reported in one of the Reuters articles the other day.

MBIA did also receive a subpoena from Connecticut Attorney General on or about the 14th of January of this year in connection with their investigation into possible violations of state antitrust laws. A subpoena generally seeks information regarding rating agencies, methodologies, and rating scales for rating municipal debt versus corporate debt, and other information related to insured municipal debt, and the rating agencies' rationale underlying their policies and methodologies used in rating different municipal debt.

We are obviously cooperating with that investigation. And then also as we disclosed in our 8-K filing on January 24th, MBIA received a subpoena from the Securities Division of the Secretary of the Commonwealth of Massachusetts that seeks information about disclosures that MBIA made to underwriters and issuers in connection with public finance transactions that MBIA insured for the State of Massachusetts and any of its agencies or subdivisions. And we are also cooperating with that.

Mitch, additionally, please comment on the massive jumps in below investment-grade exposure. What drove the change, other than the $10.6 billion of still investment-grade HELOCs?

First of all, I think we need to distinguish. When you look at the below investment-grade exposure on an S&P priority basis, the fact is the exposure was stable at the end of the fourth quarter, as I mentioned during my presentation. When you take a look at the MBIA priority below investment-grade, that is where you will see that the number has jumped up significantly.

That is because even though the rating agencies have not yet taken the deals that we have reserved against and downgraded them to below investment-grade, as is our practice because we are close to the deals, we are out ahead of it. And our below investment-grade list already includes the deals for which we've reserved against.

So the answer is the second-lien deals, as well as the CDO squareds, which we took the impairment on, are what are responsible for the growth in the below investment-grade on an MBIA rating basis, as opposed to the flat S&P priority basis of 1.4%.

Okay, folks, we have literally just a few questions that go unanswered at this point, but we're going to pull the plug on the 3:00 hour, four hours into the call. I think we've demonstrated our willingness and ability to after many of the question. In fact, I will let you know that none of the remaining question are Bill Ackman questions. We've responded to all of those that he has provided that were not redundant with other people's questions. Even where redundant, we've tried to demonstrate that he asked those questions, as well.

We thank you for your participation in today's call. The replay will be available on the website at www.MBIA.com, and we please urge you to go to the website as well for additional information on our company. As Chuck mentioned, we will be posting information over the next period of time that will be updating our outstanding disclosures on our structured finance book. Thank you very much. Good day, and goodbye.

Thank you. This does conclude today's MBIA conference call and webcast.