MBIA Inc (MBI) 2008 Q3 法說會逐字稿

Good morning and welcome to the MBIA third-quarter 2008 financial results conference call. At this time, all lines are in a listen-only mode to prevent any background noise. After the prepared remarks from the Company, there will be a question-and-answer session which will begin with questions that have been submitted in advance of the call. After those questions have been addressed, the Company will take questions from callers. (Operator Instructions)

I would now like to turn the conference over to Greg Diamond, Director of Investor Relations of MBIA. Please go ahead, sir.

Thank you, Brandy. Welcome to MBIA's conference call for our third-quarter 2008 financial results. A presentation for this event is available on MBIA's website. We have also posted on our website the information to access the recorded replay of today's call which will be available later this afternoon.

The MBIA team assembled for today's event is Jay Brown, CEO; Chuck Chaplin, CFO; and Mitch Sonkin, Head of the Insured Portfolio Management. Joining them for the question-and-answer session of today's call will be Cliff Corso, Chief Investment Officer, and Anthony McKiernan, Managing Director and Head of Structured Finance Insured Portfolio Management. Following our prepared remarks, we will hold a question-and-answer session for up to one hour. Let's begin.

The second slide of the presentation deck shows our Safe Harbor disclosure statement, which I will now read. 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. Risks 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.

Now I will turn it over to Jay Brown.

Good morning, everyone, and thank you, Greg. It's no surprise when I say that we are experiencing the most challenging time in the financial markets in almost a century. We saw conditions deteriorate almost to the point of total collapse in the third quarter. Throughout the quarter, however, we adhered to our objectives and made important progress towards strengthening our portfolio through a combination of deleveraging and by substantially increasing our liquidity.

We continued to satisfy all our obligations and pursued opportunities to enhance shareholder value such as the $159 billion FGIC reinsurance transaction. We were able to progress in our business transformation because we began early to play defense to shore up our balance sheet in preparation for more difficult times to come, which is exactly what happened this last quarter.

As a result of the greater-than-expected continued deterioration in the housing markets and the virtual absence of liquidity in the capital markets, we increased our loss expectations and our realized losses for the third quarter. While these increased losses are painful, they do not threaten the viability of our Company and while conditions in the credit markets and the economy around the world could well get worse before they get better, we are in a very good position to weather this financial storm.

As I mentioned during our last conference call and as we continued to demonstrate our ability to satisfy our obligations, as insured bondholders continue to receive their interest and principal payments, MBIA will be much more appreciated in the years in the future. But it's going to take time as the next several quarters are likely to remain challenging until the housing market stabilizes and the capital markets regain their footings.

In the meanwhile, let me discuss some of the specific accomplishments and disappointments of the quarter. Among our accomplishments was the closing of the reinsurance transaction for most of FGIC's public finance insured portfolio. This transaction is testament to the hard work and persistence of our employees and the confidence of our standing in the financial guaranty industry. We are very proud to provide greater security to insured bondholders and we are also happy to have the boost to our investments and our earnings. We continue to actively pursue similar transactions in the weeks and months ahead.

Also as we noted in our last call, even though we had largely addressed the immediate liquidity requirements of our Asset Liability Management program that resulted from the Moody's downgrade of MBIA to A2, we decided to aggressively increase the liquidity of that program to minimize any additional adverse impacts from any -- let me be clear -- any potential rating actions in the future.

However as Chuck will cover in greater detail, we have paid a price of approximately $0.75 billion for this increased protection against rating downgrades. In addition to reducing our spread earnings and our ALM program, we have realized losses on the sales and securities that might not otherwise have been realized.

With the further downturn in the performance of the housing market during the third quarter, we estimate that our insured second lien RMBS credits will in fact experience greater losses. Mitch will provide some of the additional perspective on the changes in our assumptions that have resulted in our higher loss estimates.

Clearly conditions in the housing market, particularly housing prices, default rates, and severities on defaulted mortgage loans have worsened. But negligent and deficient lending standards have also played an extremely large role in our RMBS losses. And we have officially initiated legal action against the two largest mortgage lenders of our second lien RMBS exposure to recover a significant portion of the harm that we have already suffered. It is still too early to determine the ultimate outcome of our label actions, so we have not offset any of our loss reserves at this point in time.

All in all, our Company's adjusted book value is about $37 per share at the end of the quarter. We remain committed to preserving that value and we will continue to add to it wherever and in whatever way possible. Our need to bolster liquidity for our operations and reduce the potential downside impact of adverse developments such as rating downgrades has moderated our near-term opportunities to significantly enhance shareholder value through debt and equity repurchases. But we will continue to be active as opportunity presents itself and additional deleveraging of our asset liability management portfolio occurs.

Before I conclude, I'd like to make a few points which may anticipate some of your questions. We are continuing to accept the opportunity to establish a new MBIA public finance insurance company. We received enough input from the marketplace to be convinced that this is a truly viable option and we are now actively exploring with the various insurance regulators and rating agencies how to best accomplish this. We will keep you updated as things unfold in the weeks ahead.

Similarly it's premature for us to comment on what may or may not develop for MBIA specifically regarding the Treasury Department's TARP provisions and/or other government-sponsored efforts to address the current economic conditions. However, MBIA does not need any direct assistance from any of these programs to benefit from the programs. As long as the government is successful in achieving its objectives to return liquidity to the capital markets and stabilize the ultimate housing market, we should experience lower losses on our insured credits.

We have also said we'd provide updates on commutations of our insured credit derivative contracts. There were no commutations this quarter that required any settlement payment from MBIA. More importantly, it's unlikely that negotiations on contract commutations will show much progress until there is greater clarity and specificity regarding the usage of funds under the TARP program. We expect this will occur over the next few months as our program kicks into action.

Lastly, we have produced a presentation as we have committed to to provide perspective on MBIA's commercial real estate exposure. This will be posted on MBIA's website later this afternoon.

In closing, I continue to expect as we've noted earlier in the year that the rest of this year and perhaps all of next year will remain challenging. While substantial uncertainty remains for the performance of the housing and financial markets and the economy, we remain prepared to weather this extremely difficult financial climate and we feel will be better appreciated in the long term for doing so.

Chuck and Mitch will now take you through the status of our financial condition and our insured portfolio. Afterwards I will join them to respond to any questions you have on this call. With that, I will turn it over to Chuck.

Thanks, Jay. Since 2008 continues to be the year of the balance sheet, I will spend only a few minutes on our income statement but focus in on other financial highlights and our balance sheet conditions and try to provide some additional color on what we've published this morning in our press release and the 10-Q and on which Jay has just commented.

So if you would turn then to slide five. First, our net income was a loss of $806 million for the third quarter compared to a loss of $37 million in last year's third quarter. Pretax operating income was a $786 million loss dominated by the increase of reserves for RMBS of $961 million. After that increase, pretax operating income would have been $175 million.

I will come back and talk about reserves more specifically in a minute and then Mitch will take you through the credits themselves. But this performance excluding the RMBS reserves reflects the inherent strength and staying power of our business model. As we wrote essentially no new direct business in the quarter, we are reflecting only earnings from business previously written. The FGIC transaction, which closed on September 30, doesn't affect the third quarter's income.

The investment management segment had negative operating income of $14 million as we significantly increase the liquidity of the asset portfolio in the Asset Liability Management business. At this point, more than half the portfolio is in cash and short-term securities, more than the amount of our GICs that are terminable upon a rating downgrade. This part of the portfolio has a negative spread that is the rate we pay on the GICs is higher than the earnings rate on the cash and near cash assets.

Perhaps ironically if we were to be downgraded, the operating income of this portfolio would increase as we would get rid of the negative spread.

The corporate segment had a $22 million operating loss in the quarter, about $5 million over the recent run rate. This is due to legal expense related primarily to class actions and derivative litigations.

On the nonoperating side, we had $155 million of realized losses in the quarter. About $64 million of that was due to our holdings of Lehman Brothers' senior hold co debt and the balance represents miscellaneous other impairments and net realized losses upon sale of assets in the ALM portfolio. The mark-to-market this quarter is dominated by losses related to the rebalancing of the ALM book, which I'll go over in some detail in a moment.

We had $243 million of gains on debt buybacks in the quarter, of which $207 million is attributable to investment management; $11 million to insurance; and $25 million to the corporate segment. The gains in the investment management segment helped to offset the realized losses we are sustaining to reposition the portfolio.

Finally, we had an income tax benefit equal to 23% of the pretax loss. We do not expect to get the full benefit of the capital losses in the ALM portfolio from an accounting perspective because we do not have sufficient embedded gains today to offset them.

So if you will go on to slide six, given that our business model is going to have to go through significant change, we have tried to be very careful about expenses. This slide provides some details. Compensation is by far our largest expense and you can see that the expense in the third quarter of 2008 is higher than the same period last year and that is primarily due to severance payments that were made of approximately $5 million.

The insurance division headcount shown at the bottom here is down on a run rate basis by 20% over a year ago. The run rate for comp expense is now approximately $30 million per quarter. Fees and professional services in the quarter were higher due to legal fees and the cost of our soft capital facility where we are paying the maximum rate as auctions continue to fail and I'll touch on that again later. Loss prevention expense is also higher due to remediation work on our CDOs.

Now slide 7 shows the thing that allows the business model to continue to throw off earnings despite periods of low production. It's the reservoir of deferred premium revenue and the present value of future installments which grew in the third quarter due to the FGIC transaction to a new high of $5.7 billion. The pattern of release of those earnings and the assets of refundings is shown in the bottom panel. Of course we've recently seen record levels of refundings with $88 million and $94 million in the second and third quarters respectively, so we do expect some acceleration of the trend that you see here.

Bottom line though, the FGIC transaction puts us on a new and higher earnings trajectory and is expected to contribute approximately $50 million of premiums and investment income in the fourth quarter of 2008.

Slide eight brings us to the biggest number on the income statement this quarter, the addition to loss reserves. Here is a picture of the reserve and loss development on our book over the last four quarters. The first lie is our formulaic addition to unallocated reserves, which we continue to view as sufficient to cover our non-mortgage related exposures. The second line shows the special [additions] to reserves that we've taken for our second lean RMBS exposures.

In the fourth quarter and the first quarters -- fourth quarter '07 and first quarter 2008, we had additions for case reserves of $814 million and $265 million respectively totaling $1.1 billion. In the second quarter of 2008, those deals performances trended in accordance with our expectations and we had no additions to reserves.

Payment activity in the second quarter, which is shown on the next line on the table was generally as we expected. In the third quarter, however, performance deterioration and paid loss both exceeded our expectations, leading to the increase in incurred loss of $961 million.

We now know that the vast majority of the mortgages that are defaulting in these securitizations were ineligible loans and that the seller servicers have contractual obligations to repurchase them. How that plays out in terms of our ultimate payouts and recoveries is difficult to estimate at this point from an accounting perspective and therefore, we are not recording any salvage amounts relating to the litigation we are pursuing against seller servicers over ineligible loans at this time.

In addition, we analyze our insured derivatives for potential cash payment obligations and we disclose them as credit impairments. Although the impairments are relevant to understanding our financial results, they do not affect the GAAP financial statements unless the impairment amount were to be greater than the mark-to-market on an individual case.

Our operating income disclosures however do consider impairments of insured credit derivatives as expenses similarly to our loss reserves on financial guaranty policies. We continue to expect that we will pay out approximately $1.1 billion in present value on our insured multisector CDOs. So the total incurred loss for all of MBIA's residential mortgage-related exposures is approximately $3.2 billion, which ultimately will be significantly offset by recoveries in the RMBS litigations. To date, we have paid out approximately $1 billion.

Slide nine provides the total cost of our portfolio rebalancing in the ALM business. We anticipated a total pretax loss on sales of $742 million when we reported second-quarter results based on asset prices and market conditions of the time. The $742 million is the sum of the $306 million of realized losses and $436 million of impairments shown here. Ultimately market prices and liquidity of financial assets of all kinds continued to fall right up until today, so we needed to sell more assets than we expected faster and we realized greater losses which totaled $786 million between the two quarters.

The conditions that led to the rebalancing however, also gave us the opportunity to engage in some reverse inquiry debt buybacks that resulted in a $285 million offset to the realized losses over several quarters. The impact of debt buybacks is recorded in the extinguishment of debt line on our income statement, and it is backed out of our operating income statistics.

The hedge gains are an important part of this story. We had total return swaps that were being marked up through our income statement as the corresponding assets were being marked down on the balance sheet in other comprehensive income over time. By the third quarter, we had accumulated $305 million of positive mark-to-market on those positions. A loss on the assets was realized in the third quarter and the hedge terminated.

So in the third quarter, there's a realized gain on the hedge which is embedded in the $44 million net realized loss and an offsetting unrealized loss, that is to say, there's no third-quarter bottom-line impact of those hedges. We had taken it all in prior quarters. Economically of course, the hedge does offset our realized loss. So the net impact of rebalancing this portfolio after hedge gains and after extinguishment of debt gains was $501 million pretax. We are now substantially protected we believe against any liquidity risk in this business.

Slide 10 provides details on our mark-to-market. In the last few quarters, the mark on insured credit derivatives has dominated our results and generated significant earnings volatility. This quarter that part of the market is relatively benign at $105 million and it can be broken into two pieces. The mark before the impact of the adjustment for MBIA's credit was a negative $538 billion driven by increases in spreads on collateral in the multisector and corporate CDOs.

The MBIA credit adjustment then added $606 million of positive marks. Now that part of the calculation is highly volatile and I note that our insurance swap spreads as of yesterday has declined by nearly 50% since September 30. Perversely, the more favorable view the market has of our credit quality, the more negative will the mark-to-market become.

Beyond that, we had a negative mark in the Investment Management Services segment largely related to the swap terminations that I talked about a moment ago. And in corporate, we reflect a negative mark on the warrants issued to Warburg Pincus in relation to their investment in the Company earlier this year. Both our stock price and volatility rose in the third quarter, triggering growth in this liability.

Slide 11 depicts the delevering of our portfolio which continues. Par outstanding other than in the FGIC transaction fell about $60 billion from year-end to September 30, including refunded par of $22 billion related to public finance exposures and $13 billion of terminations of structured deals. This contributes to a continued reduction in capital requirement for the portfolio as well as accelerated earnings from the upfront premium deals. The FGIC transaction adds $159 billion of high-quality par to our book of business.

On slide 12, I will spend a few minutes on our liquidity position. The investment portfolio of our insurance company has been repositioned over the third quarter to hold at 9/30 approximately $2.4 billion of cash and cash equivalents. This increase in cash of approximately $1.3 billion primarily came from sales of municipals, US governments, mortgage backed securities, and commercial paper. We have continued to add liquidity to the insurance company in the fourth quarter including additional asset sales and the exercise of our option to exchange preferred shares for $400 million of cash in the trust that has issued our CPCT or auction rate securities.

Having taken these steps, we will have -- we will be in a position to provide cash to the Asset Liability Management portfolio under the $2 billion intercompany secured borrowing facility that we recently put in place and still have the same roughly $1.1 billion of cash that the insurance company held as of June 30, 2008.

On slide 13, we go into cash flows in the insurance company and demonstrate that they continue to be adequate to cover our loss payments. We had positive operating cash flows for the third quarter and for the year to date in the insurance company even with payment of over $1 billion in gross loss payments.

Now slide 14 turns to the Asset Liability Management business again. Here is the balance sheet with the assets shown at both market value and book value. The difference between book value of assets and the liabilities measures the impact of asset repositioning, the cost of asset repositioning, and impairments in the portfolio this year.

We previously announced that we had raised sufficient cash to cover any terminations that might result from further rating actions, as Jay referenced a moment ago, thus the excess of cash and governments over the terminable GIC portfolio shown here. In addition, we've arranged contingent sources of liquidity that currently total approximately $2.6 billion which we expect will protect us from having to sell assets at current firesale values and realizing any of the current market value deficit to the liability par amounts.

The contingent sources involve the use of holding company free cash and the $2 billion intercompany secured borrowing lines from the insurance company. Cash flows from maturing assets and these contingent sources can cover all liability outflows without any asset sales or refinancings.

Also, we have been successful so far in redeeming some liabilities at discounts upon request of investors. And while most of those liabilities have been MTNs, we have also redeemed some of the terminable GICs.

On slide 15, in the holding company but outside of the ALM business, our corporate level assets and liabilities. As of June 30, we held $1.4 billion of free cash and investments at that level and buybacks of corporate debt and common stock in the quarter really drove the reduction to $1.2 billion at the end of the third quarter. Since then, we have used $600 million of that cash to bolster the liquidity of the ALM business as I just referenced.

Our commitment to maintaining unquestioned liquidity at the holding company level though remains the same. We have said that we will maintain a cushion of five years of debt service in cash, principal, and interest, and that amount is currently about $480 million. After funding this $600 million, we will still have over $100 million of cushion to that policy requirement.

Now if you'll turn to slide 16, as we have discussed several times in the past, we believe that adjusted book value is a useful tool for thinking about the value of our Company. This slide shows the components of ABD and compares our status with that of the second quarter. The boxed items reflect major changes from Q2.

We take our reported book value and factor out timing-related gains and losses that we expect to be reversed upon the maturities of the instruments and that includes both the mark-to-market on insured credit derivatives and unrealized investment gains or losses in the so-called FAS 115 adjustment or OCI. We do take account of credit impairments that ensure derivatives that GAAP does not recognize and that's the third bar here. Those adjustments bring us to an analytical book value of $25.47 per share.

Beyond that, we have the usual summation of future revenues already contracted and a provision for credit losses related to that future revenue. The deferred premium revenue item is higher as a result of the FGIC transaction and you will note now that the asset liability adjustment is a negative number where it had always been positive in the past. That is an artifact of the asset repositioning and negative spread that we've been talking about.

Adjusted book value is $37.55 at quarter end, down from $42.16 per share at the second quarter. The difference between ABV and our current stock price suggests another $10 billion of pretax losses for which we do not at this time see any credible evidence or any third-party analytic support.

Finally slide 17, which focuses on capital. Traditionally I would have talked to you about capital from a rating agency model perspective, but as the agencies are all in the process of rethinking their capital models, we are not doing that this time. So let's just talk about the overall capital position.

MBIA had a strong position at the beginning of this year with $15 billion in claims paying resources and a portfolio that was perceived to be very clean other than for our mortgage-related exposures. We knew at that time that losses and elevated capital requirements would stress our ratings levels. So we went into the market early this year and raised $2.6 billion. That is the three lowest slices of the bar on the left here and we've improved our capital position by approximately $1.5 billion since then through portfolio amortization and active risk reduction particularly in the asset liability portfolio.

So all in, the capital position is improved by about $4.1 billion. Then the amount of expected and current loss that we've recognized in our mortgage related portfolio both RMBS and impairments of CDOs is about $2.1 billion after tax. We have also taken about $500 million in losses on our ALM portfolio repositioning. And as I said, we do not expect to recover a tax benefit associated with that loss from an accounting perspective. So that $500 million is on a pretax basis.

So at this point, we have removed substantial risk and uncertainty from the ALM portfolio and from the mortgage-related exposures in the insurance portfolio and the capital position relative to the rest of our portfolio is stronger now than it was at year-end 2007.

While we have clearly not been able to clear the rating agencies moving goalposts for AAA ratings, our commitment to maintaining significant capitalization relative to potential claims remains strong.

So with that, I would turn this over to Mitch Sonkin.

Thank you, Chuck, and good morning, everyone. I am Mitch Sonkin, Head of Insured Portfolio Management. This quarter I'm going to focus primarily on the increases to loss reserves we have taken on our second lien RMBS portfolio as well as walking through the next phase of remediation on the portfolio, which commenced with the filings of litigation against Countrywide and Rescap and the filing of put back claims with IndyMac over the past 45 days.

These three institutions were the originators and are the servicers on $14.7 billion of MBIA-insured transactions which represent approximately 88% of our $16.6 billion second lien mortgage portfolio. Unfortunately loans originated by these three issuers are responsible for the majority of MBIA mortgage-backed losses to date.

In addition, I will also provide an update on our multisector CDO book, where we stand today, and what could impact impairment levels on that portfolio in the coming quarters.

Before I turn to the RMBS and multisector books, I would like to comment on the rest of the insured portfolio. First, we are continually scrutinizing our book with seasoned subject matter experts utilizing as granular data as possible not only to monitor ongoing performance of deals, but also to detect potential areas of uncertainty or potential stress in the muni end structured finance arenas.

The current crisis in the residential mortgage market has now expanded to a general economic malaise that has everyone asking about the depth and length of the economic downturn and its impact. We have seen the unprecedented collapse of several financial institutions, government enforced financial intervention and crisis management, and the introduction of the TARP program and FDIC mortgage guaranty concepts.

The full impact of these programs however will not be known for quite some time and while this intervention may well spell opportunity to achieve a level of stability heretofore elusive this past 18 months to the mortgage and housing markets, we have not made any assumptions regarding potential positive impact in our loss reserve. However, because we closely and continuously monitor all of our insured transactions, we are able to revise our modeling to adjust to a changing macroeconomic environment and loan level conditions.

We believe we have the best capabilities in the industry of doing just that and we are consistently looking for strategies to handle what could be versus waiting and reaction.

With that introduction, please turn to page 19. In addition to my discussion today, the supplemental material provided along with this presentation provides more detail on the performance of both our mortgage-related sectors as well as other relevant sectors that would be noteworthy given current market conditions. To provide you with a few headlines of sectors beyond the residential mortgage-related realm, I have a few takeaways for you.

First, our consumer-related exposures are holding up well with solid credit protection and short remaining average lives. We have no remaining primary market insured credit card exposure. Our auto books transactions are all fully funded to required enhancement levels and while unemployment rate increases could impact that portfolio, we are well-positioned for material increases and defaults due to that strong credit enhancement.

Student loan performance, both federally guaranteed and private, have held up well from an asset performance standpoint, but clearly there are funding issues in that space with the collapse of the auction rate and variable rate funding markets that we are dealing with now before we would begin to see any material issue in an otherwise currently satisfactory parity levels.

Second, commercial real estate is increasingly becoming a topic of discussion as pressure increases on the office and retail sectors despite the fact that delinquencies remain generally low. Near-term refinancing risk has been cited as one of the biggest concerns for this sector. We are fortunate that the majority of our book features 10-year fixed-rate collateral with vintages in the 2004 to 2007 time period, so the impact of refinancing volatility over the next three years should not be a major issue in those deals.

In addition, these deals do feature enhancement levels commensurate with the risk profile. For instance, with deals primarily BBB collateral, they have enhancement of 30% to 35% generally. That said, due to the inherently high leverage associated with CMBS over the last several years, we are very focused on monitoring our long-term position in this market especially on our deals with primarily BBB rated collateral, mindful of the risks inherent in commercial real estate and a severe economic downturn.

Third, given the recent slew of corporate failures and restructurings, we are also heavily focused on our investment grade corporate pools portfolio. Our corporate book has experienced minimal impact from the credit events associated with Lehman, WaMu, Fannie and Freddie with average enhancement on the portfolio down only about 1% at this point. Clearly this has been aided by the ability to restructure and recapitalize several institutions without causing (inaudible) credit events under CDS contracts which has aided portfolio performance so we continue to keep a very close eye on this sector as well.

Fourth, our muni book continues to perform satisfactorily and we are in the midst of integrating FGIC's muni book. We continue to actively lead to remediation of Lane Cove Tunnel, which is the primary remediation in the book at this time.

Now let's shift our focus to our residential mortgage-related exposures and quarterly activity. With that, please join me on slide 20. If you look at this slide, you will see that we separate our RMBS exposure in four areas. First prime, which includes international covered bond deals and capital relief trades and first lien Alt-A, which was generally insured at AAA levels. Second, direct subprime; third, HELOC; fourth closed-end seconds, which together with HELOC comprise our second lien portfolio. I will spend the majority of the direct mortgage discussion on the second lien portfolio.

As of the end of the third quarter, our direct RMBS net par outstanding totaled $33.7 billion, a decrease of approximately $2.9 billion from the first quarter. The decrease is due primarily to amortization of some capital relief trades with our international book, amortization of our subprime portfolio, and a combination of amortization and increased defaults on the second lien portfolio.

If you turn to slide 21, I will provide more detail. Our subprime book totals $4 billion. We provided you with a slide the takes a look at the asset quality metrics of the subprime book. You can see that current subordination levels generally around 30% remain strong in these deals. MBIA remains cautiously optimistic that regardless of the current REO, that is estate owned, and foreclosure buckets as well as mortgage industry projected loss rates, our [wrapped] tranches will not be materially impacted.

MBIA provided insurance on first lien product only at the AAA class of subprime deal structures since the beginning of 2004. We have almost zero 2007 exposure. Due to substantial subordination and deal loss protection on these deals and the selective strategy taken towards direct subprime exposure, we consider the current risk of material loss to be low.

Now let's take a brief look at our Alt-A exposure. We are closely monitoring this $3.5 billion Alt-A portfolio because of the increases in Alt-A delinquencies. This slide gives you a snapshot of current performance trends, enhancement averaging a bit over 8%, and enclosed foreclosure activity. We wrapped the majority of the portfolio at AAA attachment levels and we did not insure any transactions that contain pay option ARM loans, which many consider the most volatile loan type in this space. We are seeing loss severities less than 35%. So we remain cautiously optimistic on this portfolio as well, but there are a few deals that we are watching closely at this time.

Let's turn to the next slide to discuss where we are on our HELOC and closed-end second deals, the areas where we have been experiencing significant stress in our RMBS portfolio. So please join me on slide 22.

It has been an eventful quarter on all fronts for a second lien RMBS portfolio. We continue to vigilantly monitor and analyze this portfolio working with loan level forensic review experts, consultants, as well as to the collection of loan level data. Our ability to capture and review data has allowed us to aggressively review performance trends.

I will discuss the fact patterns within the insured portfolio and ongoing macro uncertainty that caused us to increase our loss reserves associated with second lien deals by approximately $1 billion. It is impossible to discuss the increase however to the reserves and ongoing poor performance without discussing Countrywide, Rescap, and IndyMac transactions in which our (inaudible) are most heavily concentrated.

Let me put this into context. Approximately 74% of the total reserves we have taken on the second lien book are associated with transactions with Countrywide and Rescap, which are part of litigation we commenced. Over 72% of the claims or $723 million paid to date on the second lien book are associated with a deals subject to this litigation. We began our review of loan level data in conjunction with our forensic loan review experts in February 2008 as we have reported all the way through.

The results of their analysis has led us to the conclusion that a very high percentage of loans in our insured deals in some cases over 80% of the loan sample should not have been there, meaning those loans either violated loan level representations and warranties or they did not adhere to underwriting guidelines. We believe strongly in the findings of our experts (technical difficulty) so currently we've experienced an elevated level of monthly loss volatility which has been sustaining itself at high levels for the last few months and we believe will likely continue over the next quarter.

These facts lead us to believe that due to a combination of worse than expected HP declines, that's housing price declines, for which we are now experiencing defaults as well as the fact that many of our deals we believe that there are a material number of ineligible loans have led to severely elevated default levels. In addition, the inordinate number of ineligible loans has created enormous challenges to the lenders with regard to modifications.

Based upon all this information and until we see evidence of stabilization or improvement, we felt it prudent to increase our reserves at this time recognizing the fact that the level of volatility is greater when trying to assess the behavior pattern of ineligible borrowers.

As of the end of the third quarter, MBIA has reserves on 73% of the second lien net par are exposure and essentially all of the 2006/2007 exposures to Countrywide, Rescap, and IndyMac. MBIA's total net par exposure for the HELOC and closed-end second book was $16.7 billion as of the end of the quarter, broken down by $9 billion of closed-end second and $7.7 billion on the HELOC front. The majorities of these deals were originated over the last two years.

So the key take away here is that we continue to give zero credit towards recoveries associated with the litigation we have commenced against Countrywide and Rescap and the claim we have filed against IndyMac when considering our loss reserving levels. We feel strongly about our cases and believe that they may in fact materially reduce ultimate losses expected for this portfolio.

Let's examine the performance trends that led to the $1 billion of reserves we've taken on the second lien. Please turn to slide 23. If you look at this slide, you can see the weighted-average conditional default rate trends of the second lien book. HELOC and closed-end second performance continues to be negative. If you can recall from our prior earnings call, particularly the second quarter call, we indicated that roll rates were somewhat flat. We believed at the time that roll rates combined with what appeared to be a flattening CDR curve for the HELOCs and end line second lien CDRs were tracking the loss estimates that we established in the fourth quarter of 2007 and the first quarter of 2008.

Furthermore if you look at the chart, quarter-to-quarter change in new delinquencies (technical difficulty) integrated by the second chart on this slide, you can see that delinquencies were actually lower in the second quarter 2008. However, as you can also see clearly, we had a large spike in delinquencies on a quarter-to-quarter basis in the third quarter, where delinquencies actually increased by 12% if you compare the third quarter to the second quarter.

So what you have is a barbell situation where we have new delinquencies entering the pipeline and servicers putting through a continuing increase in losses which are the prime drivers for our reserve increases. What we are seeing is that we believe speculation has generally flushed from the portfolio and aside from the lag effect of higher housing price declines, we are seeing macro factors creep into overall pool performance.

Rising unemployment, continued lockout of the refinance market, and servicer capitulation have begun to manifest themselves more clearly in delinquencies.

Let's turn to the next slide for more color. Please turn to slide a 24. Roll rates have behaved consistently with what we indicated last quarter. As you can see from this slide, there has not been a dramatic change in roll to loss rates in the third quarter. Now one could characterize roll rates again as flat. So the question we have been faced with is if we have flat roll-to-loss rates, how can MBIA now have new mortgage-related reserves of almost $1 billion?

The answer is that flat roll-to-loss rates cannot necessarily be characterized as an improvement and when you combine flat roll rates with a spike in delinquencies from the second quarter to the third quarter, combined, you get a significant increase in defaults and losses as you roll these trends forward.

So what does all this mean for the future? Should we expect losses to continue in excess of $1 billion additional reserves we are taking this quarter? After all, housing prices continue to fall and are predicted to continue to decrease for the near future, which could mean additional losses. As Wall Street Journal reported in October, that approximately 16% of homeowners are under water, meaning they own more on their mortgages than their homes are worth. However, we may not necessarily continue to see more homeowners become delinquent on their mortgages at the same rate we are currently experiencing.

We've done some analysis on this and the relationship of delinquencies to housing price declines in our portfolio for one of our issuers. We mapped OFHEO and Case-Shiller housing price declines to our loans. For three quarters, 2007 quarter four through 2008 quarter two, we actually reviewed the loans that because of the housing price declines now had CLTVs in excess of their loan value and their delinquency status.

What we found was that as housing prices declined from minus 5% in the fourth quarter '07 to approximately minus 12% in the first quarter '08, the percentage of loans that became delinquent also increased from 5% to over 15%. However, as housing prices continued to decline in the second quarter of this year, the percentage of loans that rolled into delinquencies decreased.

We believe this reduction in sensitivity to home price declines may have occurred because those borrowers who did not really intend to keep a home as a primary residence defaulted when home prices declined significantly and that at this point the borrowers left in our pools are the ones who would be more likely to wish to continue staying in their homes. This could well indicate a change in future losses although we acknowledge it is early to tell and we will continue to monitor the trend.

Now let's go to the next slide to sum up what this means for claims we have paid to date and our expected losses in the second lien portfolio. Please turn to slide 25.

From September 2007 when this downturn truly began to impact our second lien book through the third quarter '08, we have paid claims of approximately $1 billion. As we stated earlier, approximately 74% of the total loss reserves we have taken are related to transactions which are part of our litigation against Countrywide and Rescap. Of the $1 billion in claims we have paid to date, approximately $723 million of claims have been paid on those subject transactions.

In addition, we have paid $153 million in claims on our IndyMac transactions. Now this slide sets out our projected collateral losses on the segment of deals in the portfolio on which we increased reserves this quarter. As you can see, due to our individual deal level analysis, there's a wide range of outcomes with losses ranging from 16% to 46% of the collateral pools which are material losses. But it is important when looking at the collateral losses that those do not translate dollar for dollar to MBIA vis-a-vis ultimate losses we will incur.

Based upon performance to date and individual deal metrics, there is a benefit to excess spread on these deals and that excess spread will act as a buffer to provide some level of credit enhancements such that our actual losses are expected to be lower than collateral loss expectations.

As you can see from the deals listed here, MBIA has paid approximately $1 billion in claims through the third quarter for the transactions listed on the slide. However, actual collateral losses were nearly $2 billion. Every deal is different and some deals have pool policies that will potentially reduce ultimate losses. But we do provide the collateral losses to provide you with some insight into how the portfolio is performing as a benchmark to market projections against which we believe we are in line with. Ultimately, the benefit of excess spread will be a determinate in ultimate credit losses on the second lien portfolio.

Additionally, believe that these transactions continue to season. There will ultimately be a reduction in the percentage of loans that default. Accordingly we expect a larger percentage of MBIA losses to be covered by excess spread.

Now let's turn to the next slide for some comments on our remediation strategies, so join me on slide 26. I want to conclude this section with a very important takeaway. We have told you in the past that we would aggressively pursue remediation efforts and that we'd take actions required to procure a satisfactory outcome. As has been mentioned several times during my comments and elsewhere on the call, we have filed lawsuits against Countrywide and Rescap for material breaches of representations and warranties of their underwriting standards as well as a refusal to honor repurchased requirements for ineligible loans.

The [exception] rates to underwriting criteria as a result of our forensic analysis are staggering. Upwards of 80% to 90% in certain transactions for tested loans. The fact that 74% of the total reserves we have taken on this portfolio are related to transactions featuring these levels of ineligible loans and resulted in claims to date of $723 million emphasizes the correlation and our strong result to pursue these actions vigorously and we feel our case is extremely strong.

We are going to continue to monitor the portfolio and employ forensic experts to review problem loans in our insured transactions and continue to take the necessary steps to ensure the removal of these loans including pursuing actions as necessary.

Before I conclude this section, I want to briefly touch on IndyMac and our remediation strategy there. As you know, we've got about (technical difficulty) exposure to IndyMac in the form of two closed-end second deals and one HELOC transaction. On July 11, the FDIC placed IndyMac under its control. Our main goal has been and continues to be a coordinated effort with the FDIC to ensure the stability of the servicing platform and to work towards the transfer of servicing rights.

Furthermore, prior to IndyMac's placement into receivership, we were pursuing put back claims based upon findings from our forensic review experts. We believe that we have a valid claim that allows us to put back a substantial number of loans to IndyMac and we have filed those claims with the FDIC according to their requested procedure.

That concludes my review of the second lean book this quarter. Now let's turn briefly to our CDO and structured pools book. Please join me on slide 27, where we will briefly review MBIA's overall CDO and structured pool portfolio.

As you can see in this slide, MBIA's $126 billion CDO and structured pool exposure is primarily classified into five collateral types, only one of which is experiencing stress related to the US mortgage crisis, the multisector CDO portfolio totaling $30.4 billion. The slight increase in exposure quarter-over-quarter was due to reinsurance take backs.

You will also note the increase to the high-yield portfolio and corresponding decrease in the investment-grade corporate book. That was due to one international CDS deal reclassification; however, that transaction actually paid off after the end of the quarter on October 23.

Let me briefly update you on the four primary collateral type portfolios. First, the investment grade portfolio of $38.3 billion is comprised of diversified pools of corporate names insured with a deductible to cover losses to credit events. During the last quarter, several credit events occurred including Lehman Brothers, WaMu, Fannie and Freddie, and three Icelandic banks. Based upon the final CDS protocols for Lehman, Freddy, and Fannie and assumed prices for WaMu and the Icelandic banks, the actual aggregate impact on our portfolio was small with overall weighted average enhancement declining only 1%.

Clearly the use of ordinary course of business restructurings versus bankruptcy receiverships in the financial arena have muted the potential impacts on the portfolio to date. But at this time deal deductibles remain strong despite the large names that have defaulted thus far.

The high-yield portfolio of $14.7 billion is largely comprised of low leverage corporate loan obligations with a concentration in middle-market loans and to a much lesser extent broadly syndicated bank CLOS and older vintage corporate high-yield bonds. Deals in this category are diversified by both vintage and geography with European and US collateral.

Given macroeconomic conditions in the credit market lockup, obviously the middle-market space requires attention, but the underlying collateral are generally senior secured loans and the transactions are managed by high-quality non-bank lenders who have their interests aligned by equity positions (inaudible) MBIA's insured debt.

The commercial real estate portfolio of $42.7 billion is a diversified global portfolio of high quality and highly rated structured deals in the global commercial real estate sector. $33 billion of our net exposure in this sector is to structured CMBS pools that are not truly CDOs. These pools are comprised of static CMBS reference securities ranging from underlying BBB- to AAA bonds with vintage focused on the 2005 to 2007 subject to a deductible. Almost all of this exposure is currently rated AAA and delinquencies to date remain relatively low at this point.

Obviously there are many divergent views on where commercial real estate performance is headed, but these deals are supported by deductibles commensurate with the risk profile. We expect delinquencies to increase over the next year given stress in the office and retail sectors and that there could be downgrade potential to some of the portfolio depending on those levels.

We have some slides on performance in the supplemental information showing the composition of this book and the low delinquencies the portfolio is experiencing. And as Jay said at the outset, we will be posting materials going into substantially more detail regarding our commercial real estate book of business later today.

Now let's go to slide 28 for a review of our multisector CDO portfolio. The multisector CDO portfolio is where we have been experiencing stress related to the US subprime mortgage crisis. We have had substantial ratings downgrades and impairments on our insured book and there remains some uncertainty over where ultimate impairments will wind up given the continued volatility in the residential mortgage market.

We provide a breakout of the multisector CDO portfolio along with the total (inaudible) and credit impairments on that portfolio and associated mark-to-market as of the end of the quarter. This quarter we recorded only one new impairment for $44 million related to a high-grade CDO and we are closely monitoring ongoing RMBS collateral performance vis-a-vis our expected and stressed case scenarios. The mark-to-market certainly reflects the ongoing volatility of the underlying RMBS collateral.

In total, we now have $1.1 billion in impairments against the multisector CDO book with potential stress cases that could exceed $2 billion depending on future subprime RMBS performance and whether the impacts of TARP and other government and servicer programs are material or not vis-a-vis stemming the foreclosure tide. We believe that these impairments reflect the potential future losses we could experience and certainly reflect the position on ABS CDOs relative to defaults that has not fully manifested itself yet, but we expect will over the coming few years.

The performance of the RMBS collateral and these deals will ultimately determine future impairments. But the next several months will certainly be illuminating as to determining the ultimate direction and loss expectations for 2006 and 2007 subprime RMBS and therefore our direction on impairments.

But looking at the 2006 subprime RMBS collateral supporting our multisector CDO book, to date about 35% of the bonds have been paid down and losses have totaled 5.2%. Loss severities have been running in the mid to high 50% range. That leaves us with about 60% of the collateral remaining to determine where ultimate losses may wind up.

Given the slow movement of foreclosure timelines, momentum building towards the implementation of TARP, FDIC guarantees, and other foreclosure mitigation efforts, the next few months will be critical in determining the levels of impairments that could be required. If it appears that solutions may be manifested later rather than sooner, we will need to take a view on remaining collateral that would likely result in increases that are in the arena of mark-to-market levels this quarter.

In addition, we continue to move along with remediation and commutation discussions which could have a major impact on ultimate impairments, but we will not go into that in detail at this time.

So to sum up the key takeaways on the portfolio this quarter, first our muni exposure continues to perform well under difficult market conditions and we continue to take a lead position in the Lane Cove remediation. Second, our consumer and commercial real estate portfolios exhibit low delinquencies at this point, but we are watching these portfolios carefully for signs of degradation given weakening economic conditions.

Third, our RMBS at RMBS-related CDO portfolios continue to exhibit the stress performance resulting in the $1 billion increase to reserves on our second lien book we discussed and a view that continued volatility in the subprime market could lead to further impairments on the multisector CDO book.

Fourth, we are actively pursuing substantial claims against originators and servicers who we believe are responsible for significant losses on our second lien book due to improper origination and servicing.

This concludes my portion of our presentation, which we designed to try to answer many questions we received on our RMBS and CDO book. As I mentioned, we have provided slides in the appendix as a supplement to the general data we have previously released, which provides deal names and portfolio metrics and the majority of the structured finance portfolio.

With that, I will turn this back over to Greg.

Maybe -- we've actually now spoken for approximately for an hour and I think it's important that we just kind of recap the key issues or the key observations on the quarter. From MBI's perspective, the most important thing we focused on for the last three months, for the last six months, for the last nine months is to make sure we had adequate liquidity for any event that might happen.

Clearly, as we began the year, none of us anticipated we would have the markets that we have encountered and that has required additional steps that took place during the third quarter and into the fourth quarter. The Company is now in a position that if the current market conditions continue for another year or two in terms of an inability to sell any assets and whatever rating agency actions might take place, we would not have any kind of liquidity problems occurring from them. That's a very important position for the Company to be in in these uncertain times.

In terms of the losses that we incurred during the quarter, I think it's important -- Mitch covered all of the key points, but the key point here is we saw a significant difference in the third quarter in the second lien portfolio that we didn't observe that same kind of a change in the primary markets. The second lien market is in fact behaving substantially worse and has gone off our original trend lines, and that is what has necessitated the change that you've seen.

As we enter into the -- going into the year-end, we have a lot of opportunity in terms of adding value to the Company. We had mentioned earlier in the presentation that we are actively in discussions in terms of getting our new public finance company up and running. We are also actively in discussions on a large variety of different types of commutations, which once there is clarity around TARP we expect to see the ability for us to mitigate and reduce the amount of volatility that exists in our RMBS portfolio.

With that, I will turn it over to Greg and we will take some questions.

Okay, now we will begin the Q&A session, which will last up to one hour. We're going to start with questions that have been submitted to us in writing. We have a few of those. We will address those first and then we will open up the phone lines. So we'll start right in on that.

First question -- in fact, all three questions that we have were anonymously submitted. First question is are the terms of the repurchase agreement between the insurance company and the holding Company established?

Yes, I will respond to that. This is Chuck. The terms are established for the intercompany and repo. The holding company will be paying the insurance company about LIBOR plus 200 for draws under this facility. It is collateralized with assets from the asset liability portfolio.

I guess the other important thing to note is that as part of the approval from the New York Insurance Department to put this in place, we did deploy $600 million of holding company free cash into the asset liability portfolio to bolster it's liquidity. We have agreed that that $600 million will be available to the asset liability business until such time as the intercompany repo is repaid. Those are the critical terms of that agreement.

Okay, the next question, what are the terms of the prepared stock being put, maximum rate redemption, etc.? Are there preferreds of the insurance company or the holding company? And are the puts being honored?

Right, all of the terms of the preferred which we are exercising the options on are already set in this transaction that we've entered many years ago. So I believe that the documents are a matter of record. This was being financed in the auction rate market. The auctions have been failing since sometime in 2007. We have been paying the auction fail rate of LIBOR plus 200 since we were downgraded to the A2 level back in June.

So all that will happen now is that we will replace the cash that's in the trust with the preferred stock and the auctions will continue, although the auction period density does change after the exercise of the option goes from a 28-day cycle to a 49-day cycle. But we are expecting that those auctions continue. We continue paying a rate that's based on LIBOR plus 200.

The deal does have the option to be converted to a fixed rate, but we are not considering that at this point. The preferred stock is preferred stock of MBIA Insurance Corporation, not of MBIA, Inc. And finally, are the puts being honored? There really isn't any counterparty risk here because the cash is already sitting in the trust. So all that's going to happen is we that are going to exchange with the trust preferred stock for cash.

Okay, then the last question before we open up the phone lines, where did the cash come from for all the buy ins -- the repurchases I guess? From Insurance Co. or from Hold and Co.?

The buy-ins for corporate debt and for equity, the common stock of MBI both came from the holding company. The buy-ins were MTNs, medium-term notes and GICs came from the ALM portfolio and the buy-in for the surplus notes came from the insurance company.

Okay, so now we'll open up the phone lines to accept questions. We will use the same queuing priority as we did last quarter. We will give first priority to MBIA shareholders. Second, will be sell-side equity analysts. Third will be fixed income investors. Lastly, we'll take questions from everybody else. So now we'll start with that.

Brandy, will you please remind the callers what to do if they'd like to ask a question and then introduce the first caller in the queue?

(Operator Instructions) Darin Arita, Deutsche Bank.

Thank you. With respect to the new public finance subsidiary, what have you seen that convinces you that there would be a need for this entity?

I think in terms of looking at the marketplace and the continued disruption and for every person you can find that says there's no need for insurance, you're going to find an equal number of -- particularly in the retail sector, a large number of people who believe insurance -- it could become from a clean company reconstituted will in fact be an effective way to continue to help affect sales in that area.

It's a gut instinct. It's based on a lot of research and a lot of dialogue and a lot of observations plus the fact that we have inside of our company over 30 plus years of experience and we've been through this before when business was first established. There is initial resistance, but we do believe that there are a large number of institutions that would (technical difficulty) we have heard that in many, many parts of the country and from many regulators. And so we believe that the conditions that now exist make it a viable option for us to pursue.

As you look at the financial situation at many state and local governments across the country, how do you think about the credit risk in your insured portfolio?

Well, it's called underwriting. We don't underwrite and take every risk that is out there. We have a significant difference in those risks that are approved versus the ones that aren't. If you look at actually MBI's experience over the years, we've insured about 40% of the available credits that are out there in the market and that is the distinguishing factor.

There are credits that will from time to time have stress. We have an enormous reservoir of talent that has dealt with all of the different types of stress we've seen and we certainly think that the stress that we're going to see in the public finance market over the next two or three years is going to create a lot of opportunity for new issuance and a lot of refunding opportunities which already exist will continue over this time period.

It's times of stress that our product becomes far more valuable to both issuers and buyers of the product and it's that particular environment that we think we are going into.

Thanks, Darrin. I would like to remind callers that we are going to limit the caller to one question. If you have a follow-up question, then we could reenter the queue for that please.

[Aaron Mellick], [CQS].

Yes, as an MBIA insured bond policyholder, could you please explain with bonds trading at $0.40 on the dollar in the secondary market, could you explain why you are spending cash buying back junior capital?

The question is why buy back for example the surplus note as opposed to buying back insured debt. Is that really the question?

Yes, basically the bonds are trading at $0.40 in the secondary market, which kind of implies that there is a probability that you're going to default on your obligation. So why spend capital buying back junior parts of the capital structure instead of putting money towards debt obligation?

We can't control how our bonds trade in the market and that's a simple fact. The variety of different levels it trades at are enormous, as you well know. We have in fact bought back -- purchased for our own portfolio a certain small amount of deeply discounted MBIA insured bonds because we believe that in fact we will get a very good return on them because we expect we are going to pay out 100% on the principal and interest.

As we've seen in this particular marketplace as it exists today, there is nothing MBI could do within its current capital structure with the current views of the rating agency that it's going to fundamentally alter in the short term the trading level of our securities that are in the market. As such, what we're trying to do and what we continue to do is improve our balance sheet, improve our economics, and position ourselves for a different marketplace as it returns to stability in the days and the years ahead.

Si Lund, Morgan Stanley.

Good afternoon, guys. Just a quick question on the slide on the second lien RMBS portfolio. In the prior quarter slides, there was a sensitivity case for losses on the second lien, the closed-end seconds. We're looking at $2.1 billion now as of September 30. Do we assume that's a base case and also is there a sensitivity case that you care to disclose?

Sure, the $2.1 billion that we have now obviously taken with respect to the losses we expect in the portfolio, if you look at the 10-Q released today, you will see that we had an additional sensitivity analysis in there that (inaudible) we extended the duration of the peak default periods. We have to increase reserves by another $500 million.

Okay, thanks. I'll jump back into queue.

Jeb Bentley, Northwestern Mutual.

Maybe you guys could comment with respect to the $2 billion intercompany facility, what kind of dialogue you had. Just elaborate around regulatory view of that and why the regulators felt like that was a prudent use of capital at the insurance sub.

It's very straightforward in the fact that the insurance sub guarantees the performance of the Asset Liability Management business and that performance guarantee if you have a liquidity shortfall, the size of the loss, if we had forced asset sales would be substantially in excess of what exists today. So it's very prudent for the insurance company as a mitigation technique to provide additional liquidity to avoid those for sale and the losses that would occur if in fact there was an eventual shortfall the insurance company would be due for it.

The dialogue with the insurance department was extremely straightforward. There is nothing unknown here. It's a risk that's been understood in our company since we entered the business almost a dozen years ago and certainly something we've discussed with them over the past several quarters including at the time we raised additional capital why we were keeping capital at the holding company. One of the risks that we were concerned about was liquidity risk associated with downgrades from the rating agency.

That's why we were very comfortable with agreeing with the insurance regulators that we use $600 million of the capital available at the holding company in addition to having access to the $2 billion intracompany facility.

Thank you.

Ming Zhang, Barclays Capital.

Yes, hi. I appreciate the additional color on the CMBS CDO portfolio, but I was wondering could you break down the underlying buckets between BBB, A, AA, and AAA?

Sure, we can do that. In the CMBS pool portfolio, it's about $33 billion in net par. About 33% of that collateral, underlying collateral was AAA. About 2.5% of it is AA. 15.8% is A, about 36% is BBB with about 13% percent less than BBB. And this will all be posted on the website this afternoon. But those are the underlying collateral characteristics in the CMBS pools.

And when you look at these pools, obviously the subordination and deductible levels rather associated with these deals will be commensurate with that level of collateral attachment point.

Thank you.

Terry Shu, Pioneer Investments.

Hi, I want to go back to ask questions about the surplus notes. You spent quite a bit of time talking about and with the slide as well holding company liquidity that you can meet most of your obligations. Under what circumstances do you think that servicing the surplus notes would be at risk? I assume you've done extensive cash flow forecasts for the insurance subsidiary. Other than some kind of regulatory intervention, do you see any scenario where you would miss payments on the surplus notes -- debt service?

No.

No?

No

Okay.

I mean, it's basically -- the surplus notes where put in place with an expected payoff at the end of five years. We certainly intend to take advantage of buying back some of that early if the market presents that opportunity. In all of our planning horizons we've assumed that those are going to be paid off. Nothing we're doing inside the insurance company assumes that those surplus notes would remain in place past five years. And based on all of the scenarios we are looking at right now, Terry, it just isn't a question.

You identified the key issue, which is that surplus notes are subject to regulatory approval. We believe that the New York Insurance Department which was very supportive of our use of surplus notes to enhance the capital reinsurance company is fully aware of all our plans. We have constant dialogue with them and we have nothing in any of our dialogue with them to suggest that there would be any discomfort with continuing on their regular six-month payoff.

Yes, we would all hope so since the GSC has also issued preferred stock with the encouragement of regulators and they sort of changed their minds afterwards.

Sorry, this is Chuck. I would just point out that if you look at one of the slides in the presentation shows operating cash flow in the company for the nine months of 2008. And we think that we are in a period where we are going to be making some of the heaviest cash payments for losses that we would expect and there is plenty of operating cash flow left over to cover the interest on the surplus notes. So we don't envision any circumstance in which there is a shortfall of liquidity in the holding company.

Right, right, one just worries again about regulatory -- kind of arbitrary regulatory actions, which seems to drop from the sky these days. But --.

It has been a surprising six-month period and lots of surprises that none of us would have anticipated. I think -- I do think we have been very fortunate to be domiciled in the state of New York. We have a regulator that's been extraordinarily active in our space and has worked carefully with each of the companies and particularly has worked with each of the companies that have very different issues and opportunities in front of them and has not imposed a universal answer or a single course of action for every company.

They've allowed each company to work within its own capital space and our belief is that our relationships with New York continue to be first-class. And that based on what we see over the near term in the next two or three years, this should not be an issue that should concern people.

That said, you know as well as I do it's a world of very, very big surprises out there right now, although I do believe it's a lot better than it was a month ago or six weeks ago in terms of the gradual return of liquidity to the market that we are starting to see. We're seeing it in credit spreads and we fully expect that the liquidity that we've put in place will (technical difficulty) need to be fully utilized because the assumptions we've used is that we will not be able to sell any assets forever. And that is a very harsh assumption to prepare yourself for on that kind of portfolio.

And we fully expect that once TARP is up and running and a large variety of assets start to trade hands again, that our near-term liquidity backstop that we've put in place will not be anything that will be needed over the long term.

Thank you.

Si Lund, Morgan Stanley.

A follow-up question. In the 10-Q, there is a mention of $420 million that was posted to your derivative counterparties. In the -- first of all, I believe it was zero as of June. If you could give us an update on why there was the increase in the derivative counterparty posting? And also what type of -- if there is a downgrade, what type of increase would we see related to these specific derivative counterparties?

We do have collateral that's posted with some derivative counterparties, that is hedging-related derivatives, and I don't know, Cliff, if you know what the balance was at June?

No, I don't have the exact balances but basically the (inaudible) was with the freeze up in the capital markets in September into October the price of the security dropped and in essence put that business (inaudible) and collateral posting and net derivatives. (inaudible) attention to detail, but I don't have anything off the top of my head.

Okay, if there were a potential downgrade given the reviews that are out there from the agencies, what type of increase could we expect to see or is this just a function of market dislocation this post and we see it September 30?

Yes, it's just more if option of market dislocation because as we've talked about throughout this call, we are really immunized against the rating downgrade of MBIA. So really what is flowing there is just mark-to-market moves on the hedging primarily between the assets and the liabilities.

Okay, so if there were a Moody's downgrade, December would not increase materially?

No, it would be related to what interest rates might be doing in the market at that point in time.

Okay, thank you.

Bryce Doty, SIT.

Hello, my question is really a question I get from a number of my customers regarding your admirable efforts to discover these ineligible loans in the closed-end portfolio. And that is what processes were in place in terms of being able to verify the quality or status of those loans when these deals were done concerning the high rate of frequency of ineligible loans? It seems that a simple spot checking process could have revealed the problem at that time.

Yes, let me try to answer that in a very general way, because as you know we had remarked that we are involved in litigation and I don't want to provide any specifics.

We have said today and we have said over the course of the past several quarters that we have had a painstaking process ongoing with forensic experts, large teams of varying types of experts that have been looking at individual loan files and have been looking at other relevant data provided by the servicers and beyond. It is an ongoing process. It has resulted thus far in the three separate claims that have been filed and it's a process that will continue to cover any other loans that we have in the second lien books so that we can cleanse it all and determine whether or not the same issues that we have in the claims that been filed exist elsewhere and if they are, there will be dialogue and then if necessary there will be additional claims.

Terry Shu, Pioneer Investments.

I have a different question. With respect to the second lien performance and what has happened this past quarter, how does that compare with the rating agencies various stress tests? Now that base cases are getting closer to stress cases, I have a hard time sorting out what is the base case and what is a stress case. So how does that compare and does that mean after they see your quarter's results that they will more likely than not initiate a downgrade or put you on watch again or for a downgrade?

One is we've been sharing our results with the rating agencies continually through most of this year, Terry. Their assumptions continue to be the assumptions they've used previously and the assumptions that they are -- have been suggesting for the last three or four months are consistently higher than what we have used. We have moved a bit closer to their stress cases probably or what would be their expected cases in the case of Moody's. And I don't believe anything in our numbers will cause them to change their views based on the dialogue we've had with them.

They are assuming in some particular types of transactions particularly in the second lien, they are basically assuming the kind of performance we have had in the third quarter will continue all the way until the end of the deal.

Is that the base case?

Then on top of it, then on top of it, they add another 30% just in case they didn't get it right. So it's very hard for us to talk about their models because the models that they used were designed for a benign environment and they don't deal very well for once you get into a severe stress environment like we're in today, they're modeling is if that is the everyday appearance and using the same 367 standard deviation off of that. And it results in Armageddon type losses.

That is in fact what some of the numbers you've seen come out of the rating agencies and it's one of the points of dialogue we have with them is if you're trying to model to a stress and in fact you are taking today's world and calling it the normal world, turning it into a stress environment on top of that. We think that leads to unrealistic numbers.

But that said, because we can't control what their opinions are, we have no influence out of that outside of explaining what we think is going to happen, we have prepared ourselves for whatever (inaudible) outcome they might think of in terms of trying to think of our overall capital. So we've tried to deal with the negative effect versus trying to figure out -- there's no real point in us having an ongoing argument publicly with the rating agencies because it's not going to influence how they ultimately reach their decision.

Hopefully we will be able to explain if they actually run capital models and show us how they came up with their estimate of losses, we will be able to dialogue with interested investors and explain how their assumptions work and why we don't believe those are the correct assumptions. (multiple speakers)

But as of right now, Terry, we don't have the adequate information. They have not disclosed to us how those models work. So it puts us in a very difficult position in responding to why did they come up with a different answer?

So bottom line is that your current experience is close to the Moody's current base case and they've stressed it beyond that and they've been more or less kept abreast of your development. So today's announcement is no surprise to them. Is that sort of the bottom line?

There is no surprise. We have briefed them far earlier in the past few weeks as to what was going to happen with our portfolio, what was happening with the ALM portfolio and so they are fully apprised of today's numbers.

I do think that the important thing to understand though is that we are trying to model what we think is the expected future of the company. And trying to push down our GAAP according to GAAP rule which is put your estimate out there, identify the areas of uncertainty, give investors an opportunity to understand what if things turn out differently, what the effects on you might be. And what the rating agencies are doing are trying to replicate a modeling exercise that was designed for a benign normal environment that might go into stress some day.

It's a very, very difficult task and they are struggling with it in terms of trying to come up with and say what is the right answer in terms of capital stress.

Right, but your results to date is closer to Moody's base case, something like that.

Our results in the second lien performance area, yes. Our results in the CDO area, I believe are still below what they would identify as the base case. And that's the last published numbers we saw from them. That has been quite a while since they've published numbers, so I don't know what their current base case or stress case might be.

Okay, thank you.

To add a thought to that, Jay, first of all, it's worthwhile to note that we are -- although we have prior to this fully briefed the rating agencies on the topics that are going to be covered on this call including our loss reserve changes, we are on review for downgrade with Moody's. So I just want make sure everybody understands that.

Number two, is that we have moved to protect the company against any rating outcome that we might learn as a result of the agencies rethinking their stress model. So just two things to keep in mind is one, the process is ongoing and we haven't received the output yet. Number two, we believe that we are immunized from any downside business impact of any ratings change.

Thank you.

Gary Ransom, Fox-Pitt, Kelton.

Yes, my question is probably for Chuck on the deferred tax asset. I believe you mentioned that you have taken a valuation allowance related to the ALM realignment of the portfolio. But when you assess the recovery of that tax asset, are you looking at the cash flows of the entire organization or is it just the ALM product outside of the insurance company?

Yes, it's a good question, Gary. Because there are multiple elements to our deferred tax asset, which is approximately $1.5 billion as of September 30. The provision that we've taken is against the portion of the deferred tax asset that relates to the realized losses upon the sale of assets in the ALM portfolio. And the reason is that those are capital losses, not ordinary losses, and they can only be offset by capital gains.

From an accounting perspective, in order to not impair if you will the deferred tax asset, we would need to have the gains in the portfolio today and we don't have sufficient gains that could be realized in a carry back and carry forward period to amortize that entire deferred tax asset.

With respect to essentially the balance of the deferred tax assets, they are all generated by operating activities including the mark-to-market loss on the insured credit derivatives. Two issues on that is that our expectation is that the mark-to-market reverts to zero over the lives of those insured transaction and therefore there is a built-in gain.

If those losses were to be manifest as actual realized losses, they would be ordinary and not capital, and therefore the tax benefit would be recoverable from ordinary income that the company would expect in the future. So we do a test of that every quarter and we have kind of a severe stress of operating income -- excuse me -- of taxable income analysis that we perform to determine the recoverability of the ordinary -- the deferred tax asset related to ordinary losses. We have plenty of capacity there. We don't have very much capacity on the capital side.

Thanks for that, Chuck. Just to be clear, though, there's no other valuation allowance against any other part of that deferred tax asset? Correct?

That's correct, there is not.

Thank you very much.

Toni Spencer, Macquarie Funds.

Hello, I was wondering if you could give us some more background to the Lane Cove Tunnel exposure. What is your gross exposure, what is your net exposure? If you have been able to offset that in any way, and whether you had raised any case reserves for that specific transaction?

I'm sorry, I can tell that the first part of your question -- could you just repeat the second part of your question?

Just whether you had raised any case reserves (multiple speakers) to that exposure?

Okay, let me start with that. No, we have not posted case loss reserves. Lane Cove Tunnel is an approximate $700 million exposure that we have. It's -- you are probably familiar with your credit if you're asking me that question. It's a tunnel in Sydney Australia which we have been working on and continue to work on a mediation strategy, which is well under way. Outcome is something that we can't really comment on and won't for a while, but it is an act of remediation and we have not taken any reserving activity thus far.

Thank you.

Nic Caiano, Paulson & Co.

I just have a question regarding page 10 on the presentation regarding the mark-to-mark fair value and foreign exchange net gain loss. So the net amount is 405 but when I just look at the income statement, the amount on the income statement is $234 million. Why is that a differential?

Yes, you're looking at the consolidated income statement.

Right, but it says at the bottom of page 10 MBI in consolidated.

Yes, what you're seeing is a difference in the presentation between the consolidated income statements and the segmented income statement that we also provide. If you look at our -- the supplement on page five, you will see both sets of numbers and the reconciliation.

Page five of the supplement? (multiple speakers)

Oh, page five is the nine months, okay. So for the quarter, on page four, what you see is the build up of the consolidated financials and if you want, we can take this off-line.

Sure, we can take it off-line. That's fine.

But what the reconciliation is there on four, the column that is called subtotal in the very center of the page, will include the unrealized gain and insured derivatives, the $104.8 million. And then a few lines below that there is a net gain loss on financial instruments at fair value on foreign exchange negative $509.8 million. Net of those two is the $405 million. So it's just a difference in the presentation.

Okay, I see.

But if you want to go into it in more depth --

Yes, could we? That would be great if someone could call.

You have no other audio questions at this time.

Okay, we will wrap up then. Thanks, Brandy.

This concludes today's conference call. You may now disconnect.