MBIA Inc (MBI) 2008 Q2 法說會逐字稿

Good morning. Welcome to the MBIA second-quarter 2008 financial results conference call. At this time, all lines are in listen-only mode to prevent any background noise. After the prepared remarks, there will be a question-and-answer session, which will begin with the Company responding to questions that have been submitted in advance of the call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Greg Diamond, Director of Investor Relations at MBIA. Please go ahead.

Thank you, Cheryl. Welcome to MBIA's conference call for our second-quarter 2008 financial results. The presentation for this event has been posted on the MBIA and webcast website. The information for the recorded replay of this event is also available on MBIA's website.

The MBIA team assembled for today's event is Jay Brown, Chairman and CEO; Chuck Chaplin, Vice Chairman and CFO; Cliff Corso, Chief Investment Officer; Mitch Sonkin, Head of Insured Portfolio Management; and Anthony McKiernan, Managing Director and Head of our Structured Finance Insured Portfolio Management Group, will also be available to respond to questions. Following our prepared remarks, we will hold a one hour question-and-answer session.

Let's begin. Page two of the slide presentation provides our Safe Harbor disclosure statement. This presentation and our 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, 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 are included in this presentation may be found on our website at www.mbia.com. And now I'll turn it over to Jay Brown.

Thanks, Greg. A lot has happened since our last financial results call as every significant legacy AAA financial guarantee competitor has either been downgraded or put on negative outlook or rating watch. It is clearly a new landscape that we face and we are studying how and when we will reengage in the credit enhancement business. We are looking at all the options for continuing to create shareholder value while ensuring that our policyholders get the benefit of their existing policies. The strength of our business model allows us to consider all of our options and to be confident of any new directions we choose.

Turning to our business results, GAAP net income of $1.7 billion for the second quarter was driven by mark-to-market accounting which we have said on numerous occasions is inconsistent with the economics of our business. This is as true this quarter when the mark was positive as it was in prior quarters when the mark was negative.

We did see housing foreclosures continue at a high rate in the quarter, but that rate was consistent with the assumption we used in the first quarter to calculate our mortgage-related loss projections. We are confident in our continuing analysis of our housing-related exposures and have not changed our projections of ultimate losses on this portion of our portfolio. As such, the only material adjustment we made to our housing-related loss reserves and credit derivative impairments was a $25 million increase reflecting accretion on existing reserves.

Despite substantial remediation activities on our part and a belief that the ultimate benefits of those remediation activities will be substantial, we have decided that it is still premature to assess any benefits from our efforts on our RMBS exposures.

As you all know, the really big news during the quarter was our downgrades by Moody's and S&P. The economic effect of the downgrades hurt us in two specific ways. First, the cost of rebalancing our asset management portfolio to meet termination payments and collateral posting requirements resulted in our recognition of investment losses of $306 million that would not have occurred if it could have held those investments to maturity.

Given our absolute inability to forecast what criteria the rating indices might change in the future, we have decided to insulate the asset liability management portfolio from any future rating actions. This decision resulted in an estimate of additional losses of $436 million. From an economic perspective, this $436 million is offset by $225 million of gains on hedges related to the assets sold. So the net pretax effect is $211 million. Net of hedging gains, then the total rebalancing has an economic cost of $517 million on a pretax basis. This was the direct cost of the rating agency downgrades to MBIA.

The second major economic effect was to effectively shut down our new business production in credit enhancement and guaranteed investment contract issuance, thereby limiting our ability to add any value in the financial guarantee and asset liability management sectors from adding new policies.

While we expect to return to the credit enhancement business in the future, there is no reasonable basis for estimating when that might occur. We are also working with our regulators in the rating agencies to capitalize a new municipal-only bond insurer, which may accelerate our return. The decision to proceed will be based solely on whether we can expect to earn a reasonable return for existing shareholders if we allocate capital to that business. I would refer you to the August 5 Moody's report, which provides their most current thinking on the financial guarantee industry. As you will see in this report, it isn't yet clear what criteria a rating agency such as Moody's might use on a go-forward basis for the monoline insurers.

Having lost our AAA ratings, it will be several quarters before we have a true sense of what exactly our Company will look like in the future. Under the current circumstances, our owners should know that we will think about alternatives for as long as it takes until the credit markets normalize.

Despite the downgrade, our mission remains the same -- to create long-term shareholder value. We have no interest in pandering to traders that have extremely short time horizon.

The good news is that the business models are functioning exactly as it was designed to under this type of stress and as deleveraging has accelerated in recent months, our capital position improves even more rapidly.

Equally important, our operating earnings, balance sheet strength and strong liquidity position will allow us to meet our commitments while simultaneously creating value for our owners through investments, stock and debt buybacks where appropriate.

Based on the extremely strong capital position we find ourselves in, I was pleased that our Board has reinstated our buyback authorization. The remaining balance of our authorization will be used for repurchases in a very thoughtful and careful manner as we evaluate our capital position in the months and quarters ahead. At today's prices, obviously, any buybacks will be highly anti-dilutive compared to where they would have been months ago when we first issued capital.

In all, we have come through the first and most significant test of liquidity in our history and we have emerged with our balance sheet not only intact, but remaining strong. We have always said we were built to withstand many multiples of the stress we are experiencing and our performance so far under current market conditions has proven this out.

I continue to expect that the rest of this year and perhaps next will be bumpy, for as long as the credit markets remain unstable. But we have the resources to meet whatever challenges lie ahead. Chuck, Cliff and Mitch will now take you through our financial condition, asset liability products status and our insured portfolio. I will be back later with them to answer any questions you have on this call. With that, I will turn it over to Chuck.

Thanks, Jay and welcome, everyone. I would like to take you through a financial overview of MBIA as of June 30, 2008. We continue to look at 2008 as the year of the balance sheet with our focus on managing capital liquidity and cash flow. The Company's balance sheet strength continues to grow. Our insurance company's capital position and the holding company's liquidity position are both stronger now than at Q1. Operating cash flow continues to be adequate to cover expected claims.

Our income statement is also favorable with operating income that is vastly superior to those of the last two quarters. So let me talk about the income statement first and then come back to the portfolio and the balance sheet and book value, etc.

First, net income in the quarter was $1.7 billion as I am sure you have all seen at this point. Here are the components on an operating income basis. This non-GAAP measure, operating income, excludes realized and unrealized gains and losses, excludes the effect of debt buybacks, but includes impairments of insured credit default swaps. We think it is useful to consider operating income alongside our GAAP results.

The insurance segment had $4 million more operating income than last year. Refunded premium was $88 million, more than double last year's second quarter and scheduled premium was $188 million, or $10 million more than last year. This was offset by higher insurance operating expenses. While our gross expenses fell significantly, so did the percentage of those expenses that we defer. We also had higher interest expense on our surplus notes.

The investment management segment earned $23 million, down from $26 million last year as the asset liability portfolio shrunk by about $3 billion. We had economic gains of about $66 million from liability terminations, but those gains are excluded from operating income. The corporate segment, as you can see here, basically tracks last year.

There are three big stories in our results. On the operating income side, we will talk some more about loss reserves and impairments in the insurance company and on the non-operating side, the realized and unrealized gains and losses in both the insurance and investment management segments, which I will touch on more specifically in a moment. Incorporating the nonoperating items and taxes brings us down to the net income of $1.7 billion.

On the insured portfolio, it was reduced in size in the quarter as much more par was refunded or terminated than was added in new business. We had $10 billion of par refunded in the quarter, including large deals in the healthcare, toll road and catastrophe pool areas. In addition, it was roughly $9 billion of amortization in the quarter. We had negotiated terminations totaling $7 billion.

On the public finance side, $2 billion was terminated as issuers sought alternatives to auction-rate financing. On the structured finance side, $5 billion of exposure came off. About $1 billion of this is associated with multisector CDOs, which were terminated with no payments by MBIA. They were relatively low-risk deals where our control rights were in conflict with the needs of others in the capital structure. The balance included a large corporate CDO and a commercial real estate pool transaction.

We added exposure of $2 billion from new business written in the quarter, essentially all of which was committed prior to our ratings downgrade. Obviously, the revenue acceleration in terms of accelerated premium [received] and risk reduction results in the give-up of future premium revenues and that is illustrated a bit on the bottom of this slide. Here we show the expected future premiums as of June 30, 2007 and 2008. The starting point of each curve shows that new business was added year-over-year, but then the steeper drop in the early years for the 2008 revenue recognition curve reflect the impact of the delevering.

The impact on the third-quarter 2008 expected revenues of all the terminated and refunded deals is a 1.5% reduction. The reduction in the total amount of future expected income is about 2%. Now we do expect this delevering trend to continue in the next quarter.

Turning now to losses and impairments. Mitch Sonkin is going to provide more detail on this, but here is a roll forward of our reserve position at the portfolio level. Our reserves and CDO impairments are recognized on a present value basis, so until they are paid out, we will be recording the impact of interest accretion on both these items each quarter.

On the RMBS, we are currently making payments, which reduce the reserve. That is the all other activity that you see here. The cumulative incurred loss on RMBS is about $1.1 billion and the remaining reserve after payments made to date is $796 million. We are not making payments on the CDOs at this time, so the June impairment balance of $1.04 billion is the same as the cumulative incurred loss. The fundamental message here is that the performance of these deals has been consistent with that which we have forecasted when we set the reserves and impairment amounts and the payout patterns on these losses look like this.

Ultimately, the $2.1 billion in mortgage-related exposure reserves and impairments will pay out at somewhat over $3 billion. Again, they are recognized today on a present value basis and the numbers that you see on this slide sum to the $2.1 billion in present value. The fact that claim liabilities are paid out over time, of course, is a distinguishing feature of our insurance business model. However, we are now in the period of heaviest expected future payments, which is the box that I have drawn on the slide.

Over the seven quarters from 2Q '08 to 4Q '09, we expect to pay out a big part of the reserves on the RMBS and will begin making payments we expect on the CDO squared. During this period, we expect our operating cash flow in the insurance company to basically be breakeven. That means that if the RMBS payments end up being greater than we expect or the CDOs squared payments ramp up faster, we will end up using some asset maturities to cover payments, but that is unlikely to be very significant.

The insurance company has had more than enough operating cash inflows to meet the relevant outflows and other loss payments in the first half of 2008 and you can see that on the left-hand side of this slide. The asset portfolio, as shown on the right, is high quality and liquid. Both the asset classes shown here are self-explanatory. You have 14% of MBS shown at the bottom. Those are agency pass-through certificates, which we also regard as high-quality liquid assets. So our operating cash inflows have a very strong, second source of liquidity backing them up. This portfolio, I might note, has a small unrealized gain at this point and has been as stable in this credit crunch as we would have expected.

The capitalization of the insurance company continues to be very strong with claims paying resources $500 million in excess of Moody's AA requirements and statutory capital in excess of $400 million over the S&P AAA stress scenario. Both of these estimates are based on our analysis of the agency's most recently published capital models and those improvements -- those positions both improved in the second quarter.

However, both rating agencies have said that they will need to go through their own lessons learned process, which could result in substantial changes to these capital models, so we are on notice not to rely on these measurements as a guide to ratings outcome. Our own view is that the losses that we are taking now are not normative, but are, in fact, stress losses and the difference between expected and tail experience should actually narrow at a time like this. Our view is that our capitalization relative to risk grew by about $600 million in the second quarter and by about $1 billion since year-end 2007. And that cushion grows every day as a result of the delevering of the portfolio and the excess of investment income over expenses.

Now before leaving the insurance company, I need to comment on the mark-to-market on insured credit derivatives. These unrealized gains and losses, as Jay has said, have little to do with our business fundamentals and they are estimates of contract values that are fundamentally unknowable. Nonetheless, it is the largest number in the income statement and this quarter, it has slipped from a large negative number to a big positive.

Why? We are required to take account of the market's perception of MBIA's credit quality in determining these mark-to-market as if we were not selling our insurance policy in the hypothetical secondary market, but selling MBIA's obligation to pay on the policy in the hypothetical secondary market. The value of this interest would be highly sensitive to the perceived risk that MBIA fails to pay.

This quarter, MBIA credit default swap spreads widened out substantially, dropping the value of the contingent liability by $2.9 billion. When our spreads return to more normal levels, the value of this contingent liability will substantially increase. In fact, if we were recording a mark-to-market as of July 31, the $2.9 billion gain that you see here would be $1.4 billion less. That is to say the gain would be about $1.5 billion based on spreads at the end of July.

Without the FAS 157 adjustment and its impact on our reinsurer haircut, are change in fair value in the quarter would be nearly nil. The biggest factors here are -- one of the biggest factors is the spreads that we use to mark our European RMBS collateral. In the past, those deals were marked using US RMBS spreads. In this quarter, we identified indiligent sources for RMBS spreads that were more specific to the relevant markets, which resulted in the large positive spread that is in the spread widening column in the row marked corporate and other. That effect, plus a higher LIBOR rate and the role toward maturity of the portfolio, basically offset the impact of negative credit migration and collateral erosion.

With that, I would like to turn now to the holding company. There has been a lot of misinformation provided to the market about the way our holding company works and it has resulted in some confusion about what is really going on. So I will take it from the top. The next slide. Our holding company has two principal types of activities. Let's get the slides synced up. We need to go to the holding company. The holding company has two principal types of activities -- holding company activities, which include the governance of the consolidated firm, facilitating capital markets access for the whole company and capital transfers among our businesses and of course, holding the equity of our subsidiaries and other businesses.

We also conduct a spread lending business at the holding company, which we call asset liability management. In reality, legally, there is only one holding company balance sheet and it is shown in summary form at the top here and this is what is disclosed in our Form 10-K. Conceptually though, we think about and talk about these two activities separately. They are two distinct segments in our segment reporting, so let's look at the two conceptual balance sheets that are shown here.

First, the ALM on the right-hand side has about $24 billion market value of assets as of June 30 and nearly $25 billion of liabilities. This results in a negative equity account of $1.1 billion. However, almost all of this shortfall is the result of temporary impairments of invested assets reflected in other comprehensive income if you look at the full balance sheet. If the liabilities and assets were held to their maturity, those adjustments won't be realized and we would have a shortfall of only about $200 million. In fact, there is one ordinary course of business risk that can trigger the realization of these temporary losses, which is ratings downgrades. When we were downgraded in June, we had to sell assets to meet collateralization and termination requirements and these losses resulted in about the $200 million shortfall.

At this point, the remaining liabilities that are terminable upon a rating downgrade our substantially covered with highly liquid assets that have little or no unrealized loss. So it makes sense to think about this part of the balance sheet, excluding that other comprehensive income item, that is having about a $200 million tangible shortfall. Over time, we will need to retain earnings or realized gains in the portfolio to meet all the maturing liabilities, which we are now confident that we have the time to do. Alternatively, of course, we can provide assets from the holding company activities balance sheet, which I will turn to in a moment.

Cliff Corso is going to go through the rebalancing of the portfolio in some more detail, but the object of that exercise is to substantially eliminate the liquidity risk and to maintain very low levels of credit risk. This helps reduce the capital requirement in our insurance company, which ensures the liabilities of this business.

If the ALM business were to require additional assets to meet its liabilities, it would have access to any free assets in the holding company, which brings us to the holding company activities balance sheet on the left. It is smaller and of course, simpler. It has investments in subs, including investment management and the insurance sub and $1.2 billion in cash and $200 million of other invested assets, which is the $1.4 billion in cash and investments that we talked about. It has $1.2 billion of debt and $200 million of payables as of June 30. It has no double leverage as investment in subsidiaries are fully funded with equity. Its liquid assets are 12 times its current fixed charges and cover all currently expected cash outflows for the next 10 years.

Now, here is some detail on the holding company cash position and coverage. So the holding company had $434 million of cash at the beginning of 2008 and $1.4 billion today in cash and investment. It also has access to a $500 million bank line of credit. Further, its principal operating subsidiary has $426 million of dividend capacity, which is not shown here. Against this, we have ongoing obligations to pay interest on corporate debt that is roughly $80 million per year and operating expenses that are roughly $35 million or $40 million per year. We do have two debt maturities coming up in 2010 and 2011 for a total of $220 million. So the cash position at the holding company alone covers all of our needs for about 10 years. Frankly, we believe that the holding company's liquidity position at this point is bulletproof and it has excess liquidity. Because the insurance company's capital position is improving every day, we anticipate that, over in the future, it will be paying regular dividends.

Now, in the second quarter, our downgrade did trigger collateralization and termination rights on some of our GICs and this required repositioning of the asset portfolio. As Jay has said, we decided that it didn't make sense to maintain any rating sensitivity, so we've continued to sell assets to substantially mitigate this risk.

Now, Cliff again will give you the before and after of the portfolio, but I would like to talk about the geography of accounting for these events. We sold $7.5 billion of assets in the second quarter and had $306 million of realized losses. We sold or expect to sell $3.2 billion of additional assets in the third quarter with realized losses of another $436 million. So the total realized loss is $742 million pretax.

To see the impact on second0quarter shareholder equity, we have to subtract all of the other comprehensive income that was recorded on those assets through the first quarter. The net impact after tax on Q2 shareholders' equity is $40 million. What had happened in effect is that the value declines that we expected to be temporary on these assets have been made permanent.

There is another impact on Q2 that is not shown here. When we analyze the deferred tax asset associated with these realized losses, we concluded that there are insufficient current gains in the portfolio to enable realization of all the tax benefit, so we took a $199 million provision against our deferred tax asset and that is why when you look at the consolidated income statement, you will observe a tax rate that is about 42% in the second quarter.

Now to see the economic impact of the asset repositioning, we need to take those realized losses of $742 million and net against it hedge gains of about $225 million on some of the assets sold or expected to be sold in the third quarter. So pretax, the economic impact of losses on these sales for the purposes of drastically limiting liquidity risk is $517 million or about 2% of the total portfolio.

Here, we provide a roll of the FAS 115 adjustment to isolate the impact of the release of OCI to offset the realized losses in the asset repositioning in the ALM portfolio. As a result of the spread widening, we had an increased unrealized loss in IMS in the first half and then released $680 million against the $742 million of realized losses on sale. All of the value declines shown on this slide are expected to be temporary.

Finally, here is the analytical picture of the Company's intrinsic value updated for this quarter's results. Last quarter, I introduced this as a new measure that we called analytical adjusted book value, so we are not changing officially, if you will, the definition of adjusted book value to exclude the unrealized mark-to-market on insured derivatives. So I will just go through the components comparing to first quarter.

First, reported book value increased due to the mark-to-market and positive operating income. Then, of course, the mark-to-market loss declined. It declined by about $9.00 per share. Impairments, deferred premium and the present value of future installments are all nearly the same as the first quarter; although, as I referenced earlier, the store of future revenues is slightly smaller now than it was at first quarter. The value of future spread income in the ALM book was nearly half by the end of the quarter as we dramatically reduced our liquidity risk and terminated some positions. This item will decline further in the third quarter as we will move to a book that has substantially eliminated the potential liquidity risk. This is the biggest change in the adjusted book value in the quarter, which ends up at just under $40 per share.

We have provided in the past sensitivity around our losses and impairment to allow analysts to take their own view of adjusted book value. For every $500 million in pretax loss by which you believe that our estimate of loss is high or low is worth about $1.37 per share in the context of this exhibit so that you can do your own sensitivity analysis. Now with that, I will turn the agenda over to Cliff Corso.

Thank you, Chuck. Today, I am going to cover the second-quarter results of the investment management services segment in a bit more detail. Let's turn to slide 18. Clearly, the most significant event for asset management in the second quarter was the downgrade by Moody's, which impacted the asset liability product segment, but had no impact on the advisory services segment.

Let's start with the A/L product segment, which I will refer to as the ALM business. With the downgrade of MBI Insurance Corp this quarter, approximately $7.5 billion of GICs were either terminated or collateralized. This required a portfolio rebalancing to generate sufficient eligible collateral and cash to meet these contractual obligations. Because we manage our business to withstand stress, we maintained a significant amount of cash and eligible collateral prior to the downgrade. Therefore, required sales were less than the $7.5 billion of additional obligations.

For the quarter, the portfolio rebalancing along with the activity prior to the downgrade generated total sales of approximately $4.3 billion. Within a relatively short time frame, by June 30 we generated the necessary resources to meet all contractual obligations. We were able to prove out the flexibility built into this portfolio by quickly handling the five notch downgrade.

As I have said on previous calls, we built our business with a careful eye on the downside, and so we have continued to build liquidity beyond what was required at the A2 level in order to insulate the portfolio from further downgrade risk. While this continued rebalancing crystallizes losses that otherwise we would not have taken, we deem it appropriate given our conservative approach to managing risk.

And as you will see, the remaining investment portfolio continues to be diverse and high quality with an average rating of Aa2/AA. As for our Advisory segment, it continues to perform well. This is primarily a fee-for-service business and is not reliant on the ratings of MBIA. Our assets under management in this segment remain stable at $35 billion, and we continued to add new municipal and corporate clients, capitalizing on our strong investment performance versus our peers.

And as for our insurance investment portfolio, it remains high quality with a AA average rating. It is liquid and diverse. We recorded no impairments, nor do we expect any, and this portfolio continues to perform well.

Okay, let's shift to the next slide and discuss the required activity caused by the downgrade in the ALM business. What you are looking at is the table that shows the expected change in our liability composition once all A2 related terminations and collateralizations have been completed. While all of the resources were available within seven business days of the downgrade, the practical mechanics of the terminations and collateralizations crossed over quarter end. Given this straddle over the quarters, we thought it more useful to show the impact of the A2-driven collateralization and terminations on a pro forma basis assuming all obligations are completed.

Now let me explain the table. We have three types of liabilities -- GICs, medium-term notes and term repurchase agreements. Medium-term notes and term repurchase agreements are not subject to ratings-based terminations and thus, were not affected by the downgrade. Therefore, only the GIC portion of the liability portfolio was affected and it was affected in two ways.

Reading across the GIC row at the top of the chart, you can see that we had approximately $14.9 billion of GICs outstanding, which will shrink due to the $3.5 billion in terminations. That is the first effect. The second effect is an additional collateralization. Reading across the bottom of the chart in the row called collateralized GICs, we were required to add an additional $4 billion of collateral to the remaining GIC book. The combination of these two impacts totaled $7.5 billion of required activity previously mentioned by Chuck.

Okay, let's move to the next slide. Once completed, we will be left with approximately $19.4 billion of liabilities and we will be at the maximum collateralization point. In other words, there are no more ratings-based collateral triggers from this point forward. And while $9 billion of the remaining GICs are still subject to ratings-based terminations, we maintain a significant asset base of over $19 billion, including $7.5 billion of cash and government securities. We generated this strong liquidity position as we continue to rebalance beyond the A2 requirement in order to mitigate the effects of further downgrades.

The next slide shows the effect of the rebalancing on the asset portfolio. What we wanted to show you are the effects of the portfolio rebalancing from March 31 to July 25. The key takeaways on this table are that the portfolio now has significantly greater liquidity, it remains diverse and is high quality, an average rating of AA. In fact, we now have nearly 40% of the overall portfolio in cash and government securities, more than doubling this allocation.

While a significant portion of our rebalancing was generated out of the corporate sector, we also trimmed our ABS, CDO and CMBS exposure. Through the rebalancing, we also kept our quality allocation intact. For example, there is no change in the BBB and below investment grade rating strata, which combined represent less than 4% of the overall portfolio.

To briefly recap, in the ALM business, we were able to quickly handle the requirements of a five notch downgrade to A2 and we have continued to generate significant liquidity to insulate the portfolio from future rating agency actions while preserving diversity and maintaining a highly rated portfolio. Now I will hand it over to Mitch Sonkin to discuss our insured portfolio.

Thank you, Cliff and good morning. I am Mitch Sonkin, Head of Insured Portfolio Management. This quarter, I'm going to spend our time giving updates on how the portfolio performance compares from first quarter in our US residential mortgage-backed securities and CDO books. As a reminder, we are focusing on our prime, second lien and multisector CDO books, which are the housing-related areas we have loss reserves, claim payments and impairments. You have already heard from Chuck that we did not need to add to our reserves in these sectors in this quarter as our projected losses continue to track within our previously booked reserves. I will address the ongoing performance issues in those books, what we are monitoring to gauge future performance given the current market volatility, discuss our outlook and update you on our significant remediation efforts.

Let me point out that in the supplemental material provided along with this presentation, we provide more detail on the performance of both our mortgage-related sectors, as well as other relevant factors that would be noteworthy given current market conditions. The key takeaways from those slides are that our consumer-related exposures are holding up well with solid credit protection and commercial real estate delinquencies remain generally low. We have been vigilant in our surveillance of these areas and we will continue to watch these sectors closely.

So as we begin our discussion, our focus is on the fact that our portfolio stress is currently limited to US RMBS-related sectors, which includes both direct and indirect through CDO exposures. And I also want to note that I have with me this morning Anthony McKiernan, Head of Structured Finance in my division and a structured finance product specialist who may assist in answering some of your questions. With that, please turn to slide 24.

As you will recall in the first quarter, we took additional reserves and impairments on both our second lien RMBS portfolio and our multisector CDO portfolio. As already mentioned, this quarter, we recorded no material increases to those levels as performance is generally tracking along the lines we expected, but we continue to monitor performance closely given the continued uncertainty surrounding the US residential mortgage market, as well as additional macroeconomic pressures evolving daily in the marketplace.

On our multisector CDOs, at the end of the second quarter, we have a total of about $1 billion of permanent impairments related to the multisector CDO book, which in turn relates to five high grade, three CDO squared and one mezzanine cash flow CDO related to performance trends and projections of the inner ABS CDO collateral and stressed RMBS collateral. This is consistent with our first-quarter disclosure when we increased impairment levels on our CDO squared deals and took new impairments on the six cash flow deals. Again, there are no new impairments for this sector at this time.

Second lien exposure, at the end of the second quarter, we have a total of about $1.1 billion of net case loss reserves related to our total second lien portfolio, also consistent with our first-quarter disclosure. We did not take any material new reserves this quarter because we believe our cash flow modeling is based upon a longer time horizon. However, we will continue to monitor performance and if there is a deviation from what we expect as compared to actual losses, we will reassess the adequacy of reserves on a case-by-case basis and make any adjustments that may be necessary. Generally speaking, losses at the end of the second quarter are and remain in line with expectations.

As you may recall, we provided to the market in the first quarter of our earnings calls and 10-Qs some sensitivity analysis around our existing reserves and impairments to reflect what our losses could look like if the housing market downturn is protracted beyond what we had anticipated or if actual defaults and roll rates prove to be much more volatile than projected or currently being experienced. Delinquency roll rates, roll to loss rates and defaults will be influenced by housing price declines, rising unemployment, rescue programs, as well as general macroeconomic factors such as food and gas prices. So as I mentioned in the first quarter, the numbers in the right column are a reiteration of our sensitivity case analysis, call it a "what if" slide for example and we will come back to this later on.

Let's go to slide 25 to review again the timing of future claims payment obligations to keep the reserves in perspective. You saw this scope in my presentation last quarter and a modified version in Chuck's presentation. MBIA's potential claims payment profiles differ depending upon the type of exposures we are insuring. As you can see, the second lien-related exposures are occurring as we speak. Generally speaking, payments to date on our closed end seconds and HELOC portfolios have been related to parity payments. A parity payment occurs when liabilities, which are the notes, exceed assets, which are the mortgage loans. Our expectation is that the majority of these claims will occur over the next two years.

Our CDO squared deals are deductible deals that require MBIA to pay claims if the deals' deductibles are eroded on individual pieces of collateral as they are settled. We still expect potential payments to start next year on that book as the ABS CDO content in those deals will likely default at elevated levels. To date, we have experienced several credit events for defaults and collateral of CDO of ABS, but we have not paid any claims.

For our multisector cash flow CDO deals, we have a much longer-term payment profile. They may be timely interest and ultimate principle paid generally 40 plus years from now or principle-only deals 40 plus years from now. As a reminder, on all of our CDO exposures, MBIA cannot be accelerated against. We control acceleration and liquidation in these deals.

With that as a foundation for our discussion, let's briefly start by reviewing our direct RMBS portfolio and then we will address in more detail the multisector CDOs. Please join me on page 26. If you look at the slide, you will see that we separate our RMBS exposure in four areas -- prime, which includes international covered bond deals and capital relief trade and first lien Alt-A, which was generally insured at AAA levels; direct subprime and prime HELOC and closed end seconds, which together comprise our second lien portfolio. And I will spend the majority of the direct mortgage discussion on the second lien portfolio.

As you can see, as of the end of the second quarter, our direct RMBS exposure outstanding totaled $36.6 billion net, approximately a $1.8 billion decrease from the first quarter. The decrease is due primarily to amortization of our subprime and prime portfolios and a combination of amortization and increased defaults on the second lien book. Let's go to slide 27 for some detail.

Here, we take a closer look at our subprime book, which totals $4.1 billion. We provided you with a slide today that takes a look at the asset quality metrics of the subprime book. You can see that current subordination levels remain strong in these deals. MBIA remains cautiously optimistic that industry projected loss rates will not materially impact our wrapped tranches. MBIA provided insurance on first lien product only at the AAA class of subprime deal structures since the beginning of 2004. We also have almost no 2007 exposure.

When you look at the performance measures in the chart and consider home price declines and default propensity, we utilize a roll to loss methodology, meaning the percentages of each delinquency bucket rolling to defaults and stress recoveries beyond market realized levels. Based on our current analysis, we would still maintain adequate credit enhancement all around on this portfolio even in an elevated loss scenario. We accounted for additional HPA declines by further stressing severities to as high as 60%. So due to substantial subordinated and deal loss protection on these deals and the selective strategy we took towards direct subprime exposure, we continue to consider the risk of material loss low.

Now let's take a brief look at our Alt-A exposure on the next slide. We are closely monitoring our $3.5 billion of Alt-A exposure because of the increases in Alt-A delinquencies. This slide gives you a snapshot of current performance trends, enhancement and cumulative losses to date. I am sure you have all read the New York Times article on Monday, August 4, which indicates that, as of April, Alt-A delinquencies have quadrupled from a year ago to 12%. We wrap the majority of the portfolio at AAA attachment levels and we did not insure any transactions that contained pay option ARMs, which many consider to be the most volatile loan type in this space.

Additionally, during our review of this portfolio, we incorporated the most recent roll rate information into our analysis. We consider HPA declines by stressing severities to 40% versus the 30% we are currently seeing. So we remain cautiously optimistic on this portfolio, but there are a few deals, which we continue to watch closely.

Let's turn to the next slide to discuss where we are on our HELOC and closed end second deals, the area we are experiencing significant stress in RMBS portfolio. So please join me on page 29. As we have in prior quarters, MBIA is focusing its attention on the prime, HELOC and closed end second portfolios because of the stress we are experiencing and projecting to experience in these portfolios over the next year.

MBIA's total net par exposure for HELOC and closed end seconds was $17.75 billion at the end of the second quarter, consisting of $9.6 billion of closed end seconds and $8.2 billion of HELOC securitizations and the majority of these deals were originated over the last two years. MBIA originally wrapped these deals on a primary basis with BBB/BBB- attachment levels. MBIA only wrapped prime quality HELOC and closed-end second deals. The weighted average FICO scores of the HELOC and closed end second deals in 2006 were 706 and 719 respectively and the weighted average FICO scores in 2007 was 702 and 710 respectively.

Generally, credit enhancement consisted of overcollateralization and excess spread. Our top exposures for closed end seconds and HELOCs represented our strategy of maintaining relationships with the top tier issuers at that time. So the top would have been Countrywide, $9.8 billion or 55% of the book; ResCap, $4.9 billion, 28% of the book; and IndyMac at $1.01 billion or a little over 5.5% of the book, all totaling about 89% of the second lien book.

Now let's examine the performance trends that led to the $1.1 billion of reserves we have taken on the second lien book. We provide color here into second lien performance in the form of weighted average delinquency pipeline and cumulative losses to date. What we are seeing is that roll rates are slightly lower this quarter and that early-stage delinquencies are flat, which means it is not getting worse, but it can't necessarily say it is getting better yet. By loan count, we are seeing a trend of less current loans going delinquent each month. We hope that trend will continue and that we will see roll rates start to follow a similar trajectory.

We have also come to some conclusions determining the impact of layered risk on the performance of our Countrywide and ResCap HELOC exposures. And I think you'll find the results interesting. We determined the probability of delinquency for a combination of loans containing the following attributes. Borrowers from four states -- California, Florida, Arizona and Nevada - high CLTVs, greater than 80% to 85%, reduced documentation and certain FICO bands -- less than 650, 651 to 670, 671 to 700 and 701 to 720 -- are causing a larger proportion of delinquencies as compared to the general pool of loans.

We then calculated prepayment speeds for these loans, which allowed us to forecast the effects of layered risk on the pools. We were able to observe that a larger percentage of delinquencies were coming from the layered risk loans and established that once these loans were removed from the pool, performance should improve over time.

In past quarters, we have provided the assumptions and modeling methodology utilized to size our loss reserves and sensitivity analysis and we have provided a slide in the supplemental information today walking through again our approach and assumptions. In general, we have assumed a stressed market environment through June 2009, followed by a one-year recovery in sizing our loss reserves. We continue to monitor the trends in the housing market and realize that there is potential for a prolonged downturn in housing beyond our original estimates. However, there is more analysis that needs to be considered and observed prior to making any further determinations.

Now let's turn to the next slide for more performance metrics and turn to page 30. In previous quarters, we have provided details for the reasons and severity of the downturn in the housing market that has led to the performance of our 2005 to 2007 insured second lien portfolios since the summer of 2007. A combination of market illiquidity, layered risk fueling speculation and generally unqualified buyers, relaxed loan underwriting and more recently macroeconomic stress have all contributed to the stress in this segment of the portfolio.

If you look at this slide, you can see the weighted average conditional default rate trends of the second lien book. Clearly, performance trends have been negative, reflecting higher levels of delinquencies and defaults. In December, for example, when we took the first loss reserves on the portfolio, not only were the HELOC CDRs trending significantly higher than the closed end second deals, but there was far more consistency.

But by the end of the first quarter, the closed end second portfolio demonstrated the same performance patterns that caused us to take the additional reserves. We now have loss reserves on greater than 50% of the notional amount of our insured second lien book. CDRs at the end of the second quarter are running generally in line with our projections at this time and we are closely watching the delinquency pipelines and roll rates when considering the adequacy of the reserves. Weighted average cum losses to date are approximately 5%. So the takeaways here are those that are noted on this slide.

Now let's turn to slide 31 for claims paid to date and the outlook in the sector. We have provided for you a list of all the second lien deals that we are paying claims on and the total claims we have paid through the second quarter in the supplemental material again today. Through June 30, we have paid about $484 million in claims on second lien deals, including $305 million this quarter. Based upon our modeling through June, we have actually paid out slightly less in claims than we had projected at this point. So we will have to see how future performance unfolds versus our projections as we constantly evaluate the adequacy of reserve levels.

At this point, defaults and losses, again, have tracked generally in line with projections. But as I pointed out repeatedly, based on our modeling methodology on loss reserves, we feel that the downturn in the housing market will be with us for 2008 through June 2009, but the second lien portfolio provides additional areas of concern because of the junior lien status of the loans, the inability and future inability of servicers to maximize recovery and the lack of certainty with regard to future performance.

Servicing is at the forefront more than ever given the level of borrower issues and the volume that servicing shops are struggling with. Second lien servicing is especially critical due to the junior lien nature of the loans and the high touchpoint requirements to effectively service those loans, which, in the end, will have a material impact on defaults and loss severities.

The deterioration on what we thought were prime quality second liens has been remarkable, but one for which we believe that we have the requisite skills to monitor. We will make adjustments to reserves if we believe the lack of current market assuredness will lead to further decline in performance beyond our expectations. That said, we have attempted to surround these and set the reserves with sensitivity considered for market uncertainty.

Please turn to page 32. In this slide, we have summarized the basic assumptions leading to our current reserves and market opinion and we have also provided disclosure from our first-quarter earnings report as to what if the market downturn extends beyond our estimates or what if defaults rise well beyond the levels of our expectations.

We have estimated that an elongated housing slump with a more extended term of elevated defaults could result in potentially as much as a 54% increase in estimated losses from $1.1 billion to $1.7 billion. Our view hasn't changed from last quarter when we outlined this and this is here just as a reminder to provide some sensitivity around our results as we continue to monitor the situation very closely.

Please turn with me to slide 33. Last quarter, we described our remediation strategies and we believe that we are making steady progress on that front. We have maintained and continue to maintain open lines of communication with the originators to ensure success. However, as we have previously indicated, our loss reserve numbers do not currently contemplate the success of any remediation efforts or enforcement of our remedies.

I would like to remind everyone that MBIA has had a very successful history with regard to remediating troubled credits. We intend to remediate these deals very aggressively and as vigorously as we have had in the past so that we can achieve the successful resolution of losses. We continue to work with our team of advisers, counsel and forensic experts to examine loans to determine whether they should have qualified to have been included in our insured exposures and we are in dialogue with our largest originators.

To summarize, we believe we have strong cause for material financial compensation based upon the diligence we and our advisers have performed so far. We also feel strongly that the nature of our belief is based upon strong and incurable facts. At this point, we have sent out put-back demands to our primary issuers to the tune of approximately $300 million with negotiations in process. We are pursuing this effort and expect substantial recoveries; though I will not estimate those now.

And our efforts are not one dimensional. I mentioned servicing is very important and we continue to have teams closely monitoring ongoing servicing efforts to help ensure compliance and effectiveness on a go-forward basis.

Before I conclude this section, I want to briefly touch on IndyMac and our remediation on that credit. As you know, we have got about $1 billion in exposure to IndyMac in the form of two closed end second and one HELOC transaction. On July 11, the FDIC placed IndyMac under its control. Our main goal is to coordinate efforts with the FDIC to ensure the stability of the servicing platform and to work towards a transfer of servicing rights. Additionally, we also believe that we have valid claims that allows us to put back a substantial number of loans to IndyMac. We will continue to work this one hard on both fronts.

This concludes my review of the second lien book this quarter and now let's turn briefly to our multisector CDO book. Please join me on slide 34 where we will now discuss our other sector of concern -- multisector CDOs. Let's start by reviewing our overall CDO exposure. As you can see in this slide, MBIA's $125.4 billion CDO exposure was primarily classified into five collateral types, only one of which is experiencing stress related to the US mortgage crisis -- the multisector CDO portfolio of $29.5 billion.

The decline in quarter-to-quarter exposure is due to the payoffs of one corporate deal and two multisector deals during the quarter. Let me first describe briefly our four primary collateral type portfolios. The first is our investment grade portfolio of $42.4 billion, which 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, our risk attaches at some multiple of the AAA subordination level and we do not currently expect any material credit deterioration to this book.

The high-yield portfolio of $10.9 billion is largely comprised of low leverage, middle market, special opportunity, corporate loan obligations, broadly syndicated bank CLOs and older vintage corporate high yield bond yields. Deals in this category are diversified by both vintage and geography with European and US collateral. Approximately 60% is rated AAA and 98% AA or better. And we don't expect any material credit deterioration to this book at this time.

The commercial real estate CDO or CMBS portfolio of $42.2 billion is a diversified global portfolio of high quality and highly rated structured deals in the global commercial real estate sector. $32.5 billion of our net exposure in this sector is to structured CMBS pools that are not truly CDOs. Almost all of this exposure is currently rated AAA. We have some slides on performance in the supplemental information, which we provided today, showing the composition of the book and the low delinquencies the portfolio is experiencing.

And last, the multisector CDO portfolio is where we have experienced stress related to the US subprime mortgage crisis. We have had substantial ratings downgrades to MBIA's book with over 50% of our exposure in this space now rated below investment grade.

Let's go to the next slide where I break out the multisector CDO book and outline the impairments we took in the first quarter. That would be slide 25 (sic -- see slide presentation). Here, we provide a breakout of the multisector CDO portfolio along with the total permanent credit impairments on that portfolio and the associated mark-to-market as of the end of the second quarter. We did not have any material increases in impairments this quarter. As a reminder, the collateral at MBIA's multisector CDOs include asset-backed securities, such as securitizations of auto receivables and credit cards, commercial mortgage-backed securities, other CDOs and primarily various types of RMBS, including prime and subprime RMBS. This range of asset classes is found throughout the entire $29.5 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 BBB, mezzanine CDOs.

On the first-quarter call, we walked through all these impairments we have taken on the book. Briefly, we have $437 million in impairment charges related to three diversified CDOs of high grade CDOs, or what is known as CDO squared deals, that possess the largest buckets of inner CDOs of ABS collateral with a 2006 and 2007 vintage. And we believe we have a good handle on the potential losses on these deals and these deals are tracking within projections.

Last quarter, we also took permanent impairments to five high grade and one mezzanine cash flow CDO. Despite the fact that we won't be paying interest claims on these deals for some time, and principle isn't due until legal final maturity, typically 45 years out, we decided to take these impairments now due to our views on the future performance of the inner ABS CDO collateral and the high grade deals in the RMBS performance in the mezzanine deal.

So in total, we now have a little more than $1 billion in impairments against the multisector CDO book. We believe these impairments reflect potential future losses we could experience and certainly reflect a position on ABS CDOs, vis-a-vis, defaults that have not fully manifest itself yet, but we expect will over the coming few years. The performance of the RMBS collateral in these deals will ultimately determine future impairments and we are tracking that monthly.

Generally speaking, roll rates and new delinquency levels have been flat. But the next several months will certainly be illuminating as to determining the ultimate direction and loss expectation for the 2006 and 2007 subprime RMBS.

Please turn with me to page 36. So what if the RMBS losses are worse than our current expectations? What does that do to potential impairments? Last quarter, we provided some sensitivity around the results, which we put here again just as a reminder and our views are consistent with that data. We believe we have stressed the inner CDO collateral adequately, but if we increase our roll to loss assumptions resulting in losses to subprime in the 18% to 22% range and mute the benefits of excess spread later in the loss curves, our impairments to high grade deals of $595 million could as much as double.

As far as claims payment timing, this is a longer-term payout product. We generally don't project interest claims for 10 years and principle payment would not be required until legal final -- generally 45 years out. If you wanted to take further stress to the CDO squareds we have already impaired by increasing the loss to the remaining ABS CDO collateral and the smaller RMBS buckets in those deals, we have estimated a stress range of let's say $100 million to $300 million.

Therefore, when you combine the doubling of impairments related to the high grade deals mentioned previously and take the high range of additional stress to the CDO squareds, you would increase our $1 billion in impairments up to approximately $2 billion. Again, all of this is for illustrative purposes only from last quarter and doesn't reflect a change in current expectations.

Let's turn to page 37. As we turn to the outlook in this sector, I want to emphasize again the position MBIA has in our insured deals because there remains misconceptions about potential impacts to our liquidity based upon misunderstandings about deal liquidation potential in the CDO book.

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 generally an additional cash diversion remedy, which redirects cash away from subordinated tranches and funnels it to accelerate amortization of our senior exposure. Acceleration is distinct from liquidation of the collateral pool, which we also direct upon certain events of default as sole controlling party within our deals.

To emphasize this point, the only way a deal liquidates is if we decide to do it. Otherwise, we pay according to the policy, which will be many years in the future, for the bulk of the multisector book and after deductible erosion on individual pieces of collateral with the CDO squared book as we have outlined in the timeline.

Let me briefly summarize our outlook and touch on our remediation activities. We certainly believe the ratings agencies will continue to downgrade collateral and that the ABS CDO mezzanine tranches within the 2006 and 2007 subprime vintage RMBS collateral deals will underperform. We are actively monitoring these deals and ensuring all rights and remedies are being properly administered and we have attempted to take impairments on the deals we have identified as the highest potential issues in an effort to provide clarity to our views of risk within the book at this time.

Let me finish by talking about what we are trying to do on the remediation side for these deals and some activity that happened after quarter-end. We were able to terminate two multisector deals in April with a net par of $835 million contractually and without dispute, which we view as a positive, vis-a-vis enforcement of our CDS contracts. We continue to review and monitor collateral managers and we are prepared to take action where necessary. We have, in fact, moved management responsibilities in a handful of deals so far this year and are actively transferring a few more.

Finally, we continue to dialogue with our various CDS counterparties about either a potential remediation end market opportunities, which are ongoing. It is premature to go into detail, but if the market presents itself with opportunities MBIA feels make sense, we certainly will consider these deals.

This concludes my portion of our presentation. We designed this presentation to try to answer as many questions we received on our RMBS and CDO book and as I mentioned, we have provided slides in the supplemental data in the appendix to supplement to the general data we have previously released, which provides deal names and portfolio metrics for the majority of the structured finance portfolio. Thank you and with that, I'll turn it back over to Chuck and (inaudible).

Now I will begin the Q&A session, which will last for about an hour. We are going to start with questions that have been submitted to us in advance in writing. We will spend up to half an hour responding to those questions and then we will open up the phone lines to take your questions for the balance of the hour.

When we open up the phone lines to accept questions, we will use the same queuing priority as last quarter. We will give first priority to MBIA shareholders; second will be to sell side equity analyst; third will be fixed income investors and lastly, we will take questions from others.

So now we will start the questions that have been submitted in writing. But before we read the first question, just a quick comment. We received several questions about the direction of and level of our stock price. We are not inclined to speak to our stock price and we also received a number of questions with regard to additional details on the five terminations of the CDS contracts. And we are not going to comment beyond what has been provided in the 10-Q and the press release earlier today on those terminations. So with that, we will go to the first question.

This is from Drew Blanckenberg at One Big Idea Consulting. Please explain in simple layman's terms what is the realistic value of MBIA stock if the Company goes into runoff? Is it really such a total disaster as the shorts and media make it out to be?

Chuck, do you want to answer that one?

Sure. First, as Greg just said, I can't comment on the value of the stock. I have a different view of the value of the stock currently than the market does. So hard to say how that would play out in a runoff. However, generally and simply, the value of the Company should be equal to the present value of the expected future cash flows that are distributed to its shareholders.

The only way to get a handle on that for a company like this is to build a discounted cash flow model of the business in runoff and then you have got to determine a cash release rule that governs distributions to shareholders. Because of the fact that the distributions will occur over many years, the time value associated with the actual release of that cash will drive the valuation more than any other factor.

There is a regulatory constraint on your ability to distribute cash flows from an insurance company and if you are distributing only the amount that is your [as of right] dividend each year, you are going to have a value that is a fraction of the value of the actual free cash production of the Company. So there is really not a simple answer to this question because your cash release rule is going to be dependent upon your view of the way that the portfolio plays out over time and there are many different opinions about that in the marketplace today.

Okay, the next question comes from Kevin McCormick of Knight Libertas. Do you believe that the current IFS rating from Moody's fully incorporates the recent downgrade of Channel Re?

Looks like you again, Chuck.

Okay. Hard to speak to the Moody's rating, but I can tell you that Channel Re works like this. It has $960 million of claims paying resources. It has (technical difficulty) client, one cedent to MBIA, and the amount of our reinsurance recoverable from Channel is a small fraction of the claims paying resources.

You know, pre-rating post-rating, the claims paying resources and our claim against that claims paying resources were exactly the same. So from our perspective, nothing has really changed. Hard to say how it plays out in the Moody's capital model as I referenced earlier. Moody's itself has gone back and rethinking the way that the model works.

Okay. Kevin has another question. In looking at the fair market value of assets in the asset liability management business, there is currently a shortfall versus the book value of the outstanding insured liabilities. Does MBIA Insurance Company have a policy requiring that asset liability management business or the holding company pledge assets to collateralize these contingent insurance obligations?

If so, has the insurance company made a margin call against either the asset liability management business or the holding company as the fair market value of the assets has declined? If not, why is this exposure uncollateralized?

Do you want to handle that?

Sure. There hasn't been any margin call. The way that we look at this exposure is on a cash flow basis as opposed to market value of assets versus par amount of liabilities, because of the fact that the cash flows do pay out over time. And it is expected that the assets of the asset liability portfolio cover all of the liabilities over time.

Even if you are looking at it on the basis that's proposed here, the insurance company's counterpart is the holding company as opposed to the ALM portfolio itself. And the holding company has more than enough assets to cover all the liabilities, even in a simple balance sheet test as you suggest.

Okay. The next question from [Shawn Faranachio], an individual investor. Recently Moody's downgraded MBIA's insurance subsidiary to A2 from AAA, a 5-notch downgrade. Moody's press release was vague in terms of the capital required to regain a AAA rating, and this action seems to have temporarily froze in the gradually increasing flow of business MBIA had been writing.

In his 6/11 letter to shareholders, CEO Brown vaguely outlined the plan to capitalize a new code of rights solely municipal bond insurance, using the $900 million held at the holding company, hopefully rated AAA and able to garner a profitable book of business in plain-vanilla muni holdings. Can you comment on these statements in the efforts to capitalize and register the new co?

As we said earlier, we have developed a plan for one of our dormant subsidiaries. The plan has been submitted to the rating agencies. The uncertainty that lies out there right now is not in terms of a demand for the product. All of our surveys, all of our discussions with public indicate that there is a substantial demand for credit enhancement in the muni area right now.

The issue that we are struggling with in terms of trying to make a final decision will be ultimately what will the rating agencies want to sign as a rating? Will they in fact grant a AAA? And second, equally important, what amount of capital will be required and will that capital be able to earn an adequate return?

I expect it is going to be quite a while, two, three, four months before we ultimately are going to be able to answer those questions. We need all of the facts from the rating agencies before we can make that determination and if, in fact, we make the determination to go forward, that will be something we will announce at that time.

Okay. The next one is anonymous. Eric Dinallo wrote a piece in the Financial Times sharply criticizing those who publicly question the solvency of insurance companies, suggesting that it is explicitly against the law enacted by the state of New York in the 1930s.

Given your very vocal opponent who has put out several presentations and press releases containing precisely the type of allegations that Dinallo suggests are illegal under the law, did MBIA intend to file a lawsuit against Pershing Square for discouragement and for losses that Mr. Ackman has created for the Company's shareholders?

MBIA agrees that the statements made by certain short-sellers may have, in fact, violated New York insurance law, and we plan on cooperating with any investigation or action brought by the New York State Insurance Department or any other regulator who may wish to investigate these activities.

Separately, MBIA is assessing all of its options and will take such actions as it determines are in the best interest of its shareholders, including any litigation that may be necessary if we believe that is in the best interest of our shareholders.

An MBIA shareholder asks, what is the future or the notional value of the losses you expect to pay on the high-grade and mezzanine CDOs for which you have booked impairments of about $700 million?

Anthony, do you want to take that one?

Sure. I think as Chuck said earlier in the presentation, our total impairments and loss reserve is about $2.1 billion. We are going to pay out over $3 billion over time. When you look specifically at our CDO impairments, you have to look at them in three parts. The first is our CDO squared portfolio where we are expecting to pay claims over the next few years, so the effective discounting is very immaterial on that portfolio.

Second, there are the deals where our only payments are due at final maturity and that is usually 45 years or so. So the PV of any claims on those deals will be a fraction of the actual notional.

And the third is we have P&I transactions where our payments are going to depend on when we choose to pay off the principal and retire the deals. For instance, we called the deals in 10 years instead of waiting until maturity. The notional would differ from paying interest only for 45 years until principle is due. So the important factor here is that we have the optionality. We control the timing of settlement on these deals and we only need to pay interest for up to 45 years before ultimate principle would be due on those deals.

And this is the last question that was submitted in writing, also from an MBIA shareholder. Is the methodology for calculating the ABV over the last 10 years identical to the way you do it now? If you are no longer taking in new business because of the AAA rating loss, perhaps you need to change the formula since the overhead, etc. will be a larger percentage of future revenues.

Chuck?

Thanks. We just made a change to the methodology for calculating the ABV and it relates to the unrealized gains and losses on insured derivatives. So we are no longer counting those unrealized gains and losses in our adjusted book value except to the extent of impairments of those insured derivatives.

With respect to expenses, if you look at our gross expenses in the second quarter of 2008, they are about 40% below the expenses of the second quarter of 2007. So the point is that the Company is taking a count of the fact that expected future revenue will be lower than previously anticipated and it is readjusting expenses accordingly. So in our ABV formula, which sort of assumes that expenses are covered by the investment income on the portfolio, we think that that is still a reasonable way to estimate this value.

I think it is equally important to say that we are in a constant mode of reevaluating the cost of running the Company. We are going to -- we made adjustments when we made the decision to exit certain productlines back in January, (technical difficulty) doing much (technical difficulty) business and the structured area anytime in the near future. We have made additional adjustments in that area and we continue to look at that.

And I would expect that, as Chuck said, that the size of the Company will be kept in a proper proportion to the forecasted revenue. Ergo, we will right-size the Company as appropriate going forward to reflect what business we are actually doing, but clearly keeping in place all the staff necessary to provide the services to existing customers, particularly in the IPM and loss remediation area.

Okay, so we have responded to all the previously submitted questions in writing at this point. Now we will open up the call to live questions from participants. Due to the limited time remaining, we would like to request that callers ask a single question. If they have more questions, they can reenter the queue. Cheryl, will you please remind the callers what to do if they would like to ask a question and introduce the first caller in the queue please?

(OPERATOR INSTRUCTIONS). Andrew Wessel, JPMorgan.

Andrew, your line is live.

Gary Ransom, Fox-Pitt Kelton.

Good morning. I guess I will use my one question on the outlook for possible commutations on any of the other CDS transactions. And I ask that question in the context of there having been some with some of your competitors and whether let's just say the bid/ask spread is narrowing or is there any situations that are somewhat more encouraging that they might happen in the near future?

Given the fact that we are in active negotiations and have been in active negotiations probably for the past six months with a variety of counterparties, I do think it is safe to say the bid/ask spread is narrower than it was three or six months ago. It is impossible to kind of say in advance whether in fact you are ever going to reach a deal. We are prepared. We obviously have incredible liquidity to deal with any potential offers that are made and we have, in fact, extended offers to several people, but I wouldn't try forecast that. It's individual negotiations.

And it is also important to understand, comparing what happens with one company versus another company, the contracts are different. The exposures are different. The ability to pay is different and there is just a huge variety in the different situations. All that said, I won't be surprised at all in the next 90 days when we report out on the third quarter that we will be successful in a few, if not several, of these discussions. But it is premature at this time, Gary, to try and put a number or a probability around that.

Well, that is helpful. I was just trying to get a feel for it. Thank you.

I should say that, unless something comes up materially different than what we have reserved, unless we see there is an economic difference than what is on our balance sheet, you shouldn't expect us to provide any interim reporting on this and that we would wait until the next quarter. If something came up with a substantial different economic answer than what is currently represented in our financials, of course, we would report it as a material event.

[Mark Unfors], Columbus Hill.

Hi, thank you for doing the call. A quick question and I am not sure if you were able to address this during the formal part of the presentation, but as it related to considerations for future business possibly doing something at Cav Mac, could you give us some sense if you did do a transaction or chose to do one, would you do it as a sister to the Opco or would you consider doing it as a daughter subsidiary of Opco?

We are looking at both alternatives and right now, we have not yet made a decision, a final decision if it is something that we would make as a sister company where it would be a direct subsidiary of our holding company or whether it would be a subsidiary of our existing insurance company. There is a lot of pluses and minuses on both sides and we have, in terms of working with the rating agencies until we get some clarity, it is premature to decide which way that is going to go.

But you do have the ability to choose? It is not forced or dictated to you what do, you can choose to do one or the other?

We have the option of presenting to the rating agencies either alternative plan and we are trying to understand if, in fact, there is a distinction in how they would look at that company if it is a sister company versus a subsidiary company.

Great. Thank you.

Darin Arita, Deutsche Bank.

Thank you. I guess a question for Jay, just wondering how do you keep your employees engaged and motivated when it is uncertain when new business will be written and given what has happened to the equity they own?

Well, it is a good question. It is always a very difficult issue for a management team to keep the employees satisfied and motivated during a time period when you are evaluating options. I think it is important to understand that the vast majority of our employees actually don't do new business. It's a very small subset. The vast majority work in finance, legal, IT, very, very large staff obviously in IPM. Our entire asset management operation, which is responsible for over $60 billion of assets, is very fully occupied.

In terms of looking at how much money they have lost or their equity holdings, the way we work on that, as we explained, look, what happened has happened. It is in the past. We made mistakes in terms of our choice of risk. We have had some losses. We've recognized those losses. The market has punished us severely in terms of the stock price.

Our staff has a lot of stock now that was priced at the current stock price, actually below where we are today and that we expect from this point forward when we look at our forecast in terms of thinking about the ability to build value and the difference between where the stock is being priced today versus the underlying economics of business, this is probably the best time ever to work at MBIA. There is probably more upside potential over the next five years here than there has ever been in our Company history.

And gradually, I think more and more of our employees are beginning to recognize that and understand that from this point forward where we are going is going to be able to create a lot of value for our shareholders. We believe that value will get recognized through our stock price and that is the kind of thing that gets employees motivated.

Thanks, Jay.

[Annan Kirshnan], [Forward Research Management].

Hi, I'm sorry about that. I had a question related to this $5 billion of credit contracts that you have terminated. If you can give any additional color. I think you indicated there were two CDO contracts of $800 million. If you can give additional color on the $5 billion, that would be helpful. Thanks.

We are not going to provide any details on any terminated contracts unless they involve a substantial economic payment out and in all five cases, none of these contracts involved any payments whatsoever. So we don't think there is a lot of value in spending time talking about it. But thank you for your question.

Scott Frost, HSBC.

With respect to your matched funding book, what would be helpful is sort of a full maturity profile of assets and liabilities since you really can't write anymore new business considering the rating, that is my understanding. Would you be willing to provide a schedule of maturing liabilities for that book of business and the equivalent of say a Schedule D for this business in the interest, of course, of greater transparency and for investors to better understand your liquidity position?

Cliff, why don't you handle that.

Sure, I will take that one. And I think we've reported this in the past. What we do provide is an estimation of the average life of the assets and the liabilities. We have talked about being a matched book of business between the assets and liabilities. It is a long-dated portfolio.

But it has got a lot of front-end loaded stuff, right? When I look at the maturity profile of the liabilities, at least on the F8 MTN side, a lot of it is front-end loaded, right? And I know you can call on the insurance company to support these liabilities, as well as the holding company, but it may be helpful especially since you have kind of a negative equity position. I know you have explained that, but it might be better, in the interest of making us understand that you are well-matched here to show how this thing is going to roll off in more detail.

Sure. While there are a lot of front-end liabilities coming due, there are a lot of front-end cash flows coming due. Chuck talked a little bit about the shortfall. The first cash flow shortfall to that small number Chuck was talking about doesn't come until the year 2017 and beyond. So it is a five-year plus book. In fact, the assets are slightly shorter than the liabilities at this point in time.

So you are asset sensitive then, right?

Asset sensitive in terms of -- while we have more asset cash flow, it is shorter dated, i.e. more maturities on the asset side shorter dated.

Right, right.

Than on the liability side.

Okay, that's helpful. All right, thank you.

Corey Gelormini, John Hancock.

Yes, thank you very much. Just in terms of something that you had talked about earlier in terms of -- given some updates on your CMBS portfolio and you commented today that it is really not -- that you have a big chunk of that, which is really not a CDO, but a CMBS structured type deal. Could you basically explain what that is and what is in these things?

Once again, you classify it under the CDO book, so obviously, we think it is a pool of other quote a whole bunch of other securities and who the heck knows what they are. But I guess could you give us more clarity in terms of what are in these pools and specifically today, you said it is like a structured CMBS, what does that mean? And certainly, do you give any attachment points to any of these things in any of your presentations?

I am going to have Anthony McKiernan answer that question. I should say we are a little bit late. We are planning on putting some supplemental disclosure out probably in the next two or three weeks on the CMBS book, including an explanation of the different forms of contracts that are there and you will see that on our website in a few weeks. But Anthony, why don't you give a response right now to that question.

Sure. The CMBS pools are basically structured pools of different multiple CMBS bonds that are pooled together into a transaction that is a deductible-based transaction. So you have got potentially say 50 CMBS bonds that could be all AAA rated. They could be all BBB rated, different vintages and so forth that are put together into one transaction. These deals are synthetically referenced. The deductibles on the deal depend on the underlying ratings of the collateral, but unlike -- it is not done with CDO technology.

So what needs to happen is for each of the CMBS bonds, you have got individual pieces of collateral that -- say you have got a BBB piece of collateral with 3% or 4% underneath it. That piece of collateral would have to erode before any of MBIA's subordination would start to erode and then you would have to see that across a wide range of bonds before MBIA's subordination would be deteriorated enough that we would have to pay claims. But the nature of these transactions are that these are deductible-based. So once the subordination is eroded, we would start paying claims on those deals.

So that is no different than the enhancement you would have on a CDO of a whole bunch of these CMBS -- I mean it is deductible-based, but there is really no distinction in terms of what has to happen. So I mean deductible-based -- if you have a BBB CMBS with, as you say, 3% to 4% enhancement, I guess once you erode that 3% to 4% with the CDO methodology, then there would be no cash flow going from that thing -- I guess what is the difference in a deductible framework. It would be the same thing. You would take that whole pool and once you hit an aggregate deductible, then you would have to start paying points just like whatever the enhancement is in the outer CDO layer.

Right. And I am happy to actually take this as a follow-up if you want to call afterwards and I will walk you through the structures. But yes, basically you have to have --.

So you are trying to make a distinction that it is a deductible base and from my mind and you are saying it is not CDO methodology and I guess I don't see a distinction.

These are static transactions. They are not managed transactions.

Okay.

Number one, they don't have CDO type triggers and ratings-based triggers on them. These are just bonds, individual bonds that are put in a transaction with a high level of subordination on a true deductible basis. The CDO technology does take into account triggers, rating-based triggers, interest coverages, things of that nature. There is no interest component to what we are talking about here.

Very good, thank you. That's helpful.

Thomas MacLaren, STB.

Hi, there. I just had a quick question on slide 25. My question is payments that were made out this period, which I believe were $304 million, $305 million, were those payments being actually deducted from potential claims payable timeline? And also following on from that, I noticed that there has actually been a reduction in the closed end seconds from 593 I believe it was in Q1 to 544 and yet I can see on slide 21 the two Countrywide home equity series, which I don't remember seeing in the Q1 results. Would you be able to clarify that for me, please?

Mitch, do you want to handle the first question and then --?

Sorry, let me just tell you, the Countrywide I'm talking about, Countrywide home equity series A7, S2 and S3.

I understand that question. Chuck, why don't you handle the cash question first?

Sure. The payments of cash in the quarter were about $300 million and if you go back to slide 7, it shows that the reduction in reserves was about $187 million. So what actually happens with respect to these transactions is that some of the payments that are being made are actually expected to be recouped from those securitizations as excess cash builds up in them over time. So what happens in effect is you make a payment as like an advance to set up a salvage against it. So the net payment that was made was $187 million. The gross is right around $300 million.

And then Anthony, do you want to speak to the two transactions where we had payments this quarter that weren't included in the first quarter?

Sure. There are going to be those transactions where we have projected certain outflows over time on deals where ultimately we think we will get paid. So there may be certain transactions that you see over time where we do have some outflows that may be due to timing, may be due to performance, but ultimately we believe we will be reimbursed for.

And the two Countrywide transactions he mentioned, are those of that ilk?

Those are two of that ilk.

We just need to distinguish between losses and payments as they go out.

Right.

And so just to be clear, on the 187 that you mentioned from slide 7, has that 187 been removed versus Q1 numbers that were included in the potential claims payable timeline?

Yes, it is -- on the timeline, we didn't remove it, but when you look at the reserve roll-forward on page 7, you can see it coming out. So you started out --.

Right. I've got you. Thanks very much.

[David Bremler], Wells Capital.

Good morning. Could you just give a little color as far as the RMBS portfolio, as far as the pre-payment speed and how does that impact your assumptions as far as your payments and cash flows going out?

Sure. Anthony?

Sure. On the second lien portfolio, obviously, we have been assuming very slow voluntary prepayment speeds given the lack of refinancing in the marketplace. So what that does on a voluntary basis is that for the deals that are performing, obviously, we are getting the benefit of excess spread that you would not get in an environment where you have got a large amount of voluntary prepays where those loans are leaving the pool. But obviously, the majority of prepayment at this time that's coming on those deals is due to nonperforming assets, which we would expect to have happened during this elevated default period.

And have those assumptions changed over the last quarter?

Was the question have our assumptions changed since last quarter?

Correct.

They have not.

Okay, thank you.

Si Lund, Morgan Stanley.

Good morning. Si Lund from Morgan Stanley. I am looking at slide 32 and the RMBS portfolio and just would like to get a sense, at a high level, the drivers behind not taking the, what I would call the more conservative case of the $1.7 billion reserve for the RMBS portfolio, particularly considering the rise or the increase in paid losses during the quarter.

Well, the fact of the matter is we can -- in looking at that, it is the exact same slide we showed last time. We have projected losses roughly at this level through the first six months of the year. So in terms of looking at our assumptions, it was our conclusion that there was no need to change the assumptions. We can -- you can always use a different set of assumptions and get a different number. You can change those anytime you want. Our responsibility in terms of looking at our GAAP statements is to put out what we believe are the best assumptions based on the information that we have at this time.

Our assumptions didn't change during this quarter. So it would be -- we could put any number in there following the logic that you just used. That is a more conservative number. I could double it, I could triple it, I could quadruple it and it would be even more conservative, but it wouldn't be consistent with the assumptions that we are using or consistent with what we have observed in the marketplace. And everybody is entitled, including any analyst, to come up with any assumptions they want in terms of deciding what they think will happen. Our responsibility is put forth what the Company believes are its best assumptions.

(OPERATOR INSTRUCTIONS). Eleanor Chan, Aurelius Capital.

Hi, so I just have a question about the subordination level on the pooled CMBS transactions. It was mentioned in the Q that the subordination levels really vary a lot in the 2006 finish from 10% to 70% and the 2007 vintage from 5% to 82.2%. So I was just wondering what is the weighted average subordination and whether it is weighted more towards the 5% or the 82%.

I don't have the weighted average subordination of the entire pool, but just in general terms, if you've got a deal with all AAA collateral, your subordination levels are going to be 5% to 10%. If your transaction is more composed of BBB collateral, you are going to have subordination levels of 30% to 35% generally. That is about as much color as I can give you on that at this point.

Okay, thank you.

Scott Frost, HSBC.

Yes, you talked about the newco. You are about two to four months away from any answer. In the event you can't get a highly rated newco or if you do, markets don't price your [wrap] favorably, I imagine that plan B is to sort of wind down the business in an orderly manner, as expeditiously as possible. And is it fair to say that your share price should sort of accrete to your book value over time and if that is a fair assessment, then how long do you think that should take?

Well, we expect to be in business for 35 or 40 more years, so in terms of time horizons, we are going to be around for a long time at a minimum. That is even if we never write another policy. I think there is an awful lot of focus and we have had a lot of questions about newco and opportunities in the next month, two months, four months and the reality is is nobody knows where the credit enhancement markets are going to be two years from now, four years from now or six years from now.

We have an incredible revenue stream. We have incredible liquidity and capital resources. We are not going to make a decision in the short term just for appearance sake. If it is a good opportunity to open up newco in two months, we will do so. If it is a good opportunity in four months, we will do so. And if it makes more sense to wait a year or two and for the markets to settle down where spreads are more normal and people will appreciate the value of credit enhancement, that would be the time we would open it.

We have got 436 million reasons why people are going to buy insurance out there already in the first six months of this year by claims paid. And people have to understand that, right now, there is a lot of focus around enhancement being ratings-based, but before this is all over, over the next two or three years, people are going to have claims paid that would not otherwise have been paid if they had bought insurance. They are going to be very satisfied customers.

My experience has been that following any event like that, people ultimately value insurance much higher and I believe that the future for credit enhancement, particular for those companies that have financial resources that are adequate to meet all of their obligations and get through this kind of a stress period, are going to have a clear good market opportunity. That is where we believe MBIA is. That is where we believe we are going to be in the future and we are just not going to be rushed back into that.

We thought we had an opportunity earlier this year based on the rating agency guidelines that existed at that time to recapitalize the existing insurance company at AAA. It turned out the rating agencies didn't maintain those same assumptions, changed the assumptions, which puts us into this time period where we are right now where we have to take time and reevaluate.

But it is not -- we are a different form of company and it is hard for people to understand. Our revenues -- if you look at our revenues this quarter, look through to the operating earnings, the operating earnings were higher than they were a year ago and that is for a company that did virtually no new business in the quarter and that is the underlying economics that allows this business to be around for a very, very long time. And that is exactly how we are looking at it right now.

Let me make sure I understand. You had said that -- are you contemplating a situation where credit enhancement may not indeed be ratings-based? Is that part of what I heard?

I think it is going to be less ratings-based and more based on --

Brand?

-- believing in the value of the ultimate protection. We have all gone through and suffered in the world credit market and found out that ratings are a temporary phenomenon that come and go very quickly, but what we sell, the ability to sell, I guarantee that if you have a claim on your contract and bring forth that claim, we are going to meet that claim. That is, in fact, what we have done through the first six months of this year and there are people who are extraordinarily pleased that they chose to buy that insurance, which was very cheap two or three or four years ago when they bought it and we believe that there is going to be a shift more to the market saying, hey, if I want to buy insurance, I want to make sure it has got some value attached with it because the ratings seemed to change and have changed very rapidly and there is less faith in ratings at this point.

So our view is there is going to be a good opportunity for enhancement. It is not going to look the same or be the same size or probably be as widespread, but where enhancement is purchased, I think it is going to be a very valuable product and I think people are going to be willing to pay for it.

Okay, thank you.

There appear to be no more questions at this time. This concludes the Q&A session. Greg, your closing remarks?

Thank you very much, Cheryl. Thanks to all of you who joined us for today's call. I encourage those of you with additional questions to contact me directly at 914-765-3190. We also recommend that you visit our website at www.mbia.com for additional information. Thank you for your interest in MBIA. Good day. Goodbye.