MBIA Inc (MBI) 2009 Q3 法說會逐字稿

Good morning. Welcome to the MBIA Inc. third-quarter 2009 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. (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, Christy. Welcome to MBIA's conference call for our third-quarter 2009 financial results. We are going to follow the same format as last quarter's call. Chuck Chaplin will provide some brief comments and then we will start the question-and-answer session. We have posted several items on our website, including the Form 10-Q for the quarter. We have also posted a revised version of the quarterly operating supplement for the third quarter as we made some corrections from the one that was originally posted last night. The information for accessing the recorded replay of today's call is in our financial results press release, which is also available on the website.

Our Company's definitive disclosures are incorporated in our SEC filings. The purpose of our call today is to discuss some of the points raised in our most recent 10-Q to facilitate a greater understanding for investors. The 10-Q also contains information that will not be addressed on today's call.

Please note that anything we say on this call is qualified by the information provided in the 10-Q and our other SEC filings. You should read our Form 10-Q as it contains our most comprehensive disclosures as of the end of the third quarter about the Company and our financial and operating performance, as well as subsequent developments. Today's Q&A session will be handled by Chuck Chaplin, President, CFO and Chief Administrative Officer of MBIA.

Here is our Safe Harbor disclosure statement. Our remarks on this conference call may contain forward-looking statements. Important factors such as the general market conditions and the competitive environment could cause actual results to differ materially from those projected in our forward-looking statements. Risk factors are detailed in our 10-K, which is available on our website. 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 our remarks today may also be found on our website. Before we begin the Q&A session, Chuck Chaplin will provide a few introductory comments. Chuck?

Thanks, Greg and good morning, everyone. For MBIA Inc., this quarter is another one in which the continued weakness in the US housing market and the economy has negatively impacted our financial results. As a result of additional loss activity, we are disappointed with our operating results for the quarter.

While we still cannot predict the path of this recession, we believe that the potential future volatility in our housing-related exposures may be moderating. And our companies are emerging with their balance sheets and their human resources sufficiently strong. We don't believe that the business model we will pursue in the future will be identical to that of the past, but that the inventory of skills and our balance sheet capacity that we have can be used to build value propositions that will work in a market in the future. We are not out of the woods at this point, but at least we have a better appreciation of the total area of the woods that we are in.

Although we manage our two insurance businesses, our asset management advisory business and our winddown ALM businesses separately, I will discuss our results at the consolidated level and then I will make some comments about the business contribution.

In addition, our press release focuses on year-to-date results, which we think is the appropriate way to think about a business like ours. But I will focus my comments here on the third quarter to provide that detailed context on the most recent period.

As you know, we keep score of operating performance and value creation over time with a statistic called adjusted book value. Fundamentally, adjusted book value, or ABV, is a measure that present values the tangible worth of the Company. It is defined in our supplement at page 57 and it is displayed by business on page 9 of the supplement.

In the third quarter and in the year-to-date period, our consolidated ABV declined from $40 per share to $39 per share. The primary drivers of this decline in the third quarter were loss reserves and impairments in our insurance portfolios and realized losses on invested assets partially offset by all other sources of income and gains on debt buyback. I will make some comments on each of these drivers.

First, loss reserves and impairments of insured credit derivatives. The biggest sources of volatility have been in MBIA Corp.'s second lien RMBS. To date, we have incurred $2.2 billion of loss in this portfolio. We have made $3.3 billion in payments. We have recorded $2.1 billion in total recoveries and have a remaining reserve of $1 billion.

In the third quarter, we saw initial delinquencies decline less than our expectations and in a minority of deals, initial delinquencies actually rose. You can see this effect in the supplement on page 47. The average pace of decline was greater from February to June than it was in the third quarter; although the overall decline does continue.

As a result, we increased our expectation for future net loss payments by approximately $184 million. We also increased our estimate of recovery from seller servicers based on our contractual rights to have ineligible loans repurchased or replaced by about $76 million.

In addition to our loan putbacks and litigation recovery efforts, we have also aggressively pursued transfers of servicing through underperforming deals as historically we have seen material improvement in credit performance when collateral is placed in capable hands. To date, we have transferred servicing on 10 second lien transactions comprising approximately $3.7 billion of collateral to new servicers that we believe to be highly capable to handle the high touchpoint servicing required for second liens. We believe that overall performance should improve as these deals are fully integrated into these new servicing platforms.

Moving beyond the second liens, we also added $83 million in loss reserves for one Alt-A first lien RMBS transaction in the quarter. Unlike our other Alt-A exposures, this deal comprises primarily adjustable rate collateral, which is expected to significantly underperform the fixed-rate Alt-A portfolio.

The total Alt-A portfolio that we have originated in 2006 and '07 is approximately $2 billion and this deal represents about a quarter of the portfolio. All told, our increase to loss expectations for RMBS, that is the second lien and the Alt-A, was $191 million in the third quarter pretax and the total insurance incurred loss in MBIA Corp. was $210 million.

Although not recognized for GAAP, our ABV statistic also considers credit impairment on our insured CDOs. From 2007 to September 30, we have incurred a total of about $2.4 billion of losses, including $594 million paid to fully or partially settle these credits, leaving a net credit impairment outstanding of $1.8 billion. We increased the amount of the impairment by $250 million in the third quarter. The increase is due to projected further deterioration of subprime RMBS collateral in these deals. The expected severity of loss in the subprime market continues to rise.

There has been some favorable news on the housing front lately with house prices starting to firm. On the other hand, higher unemployment may be negative for our second liens. So while potential volatility may be about the same as last quarter, the fact that we have less par outstanding as a result of terminations on our CDOs and payments on the RMBS suggests at least we're making some progress at working through these issues.

So that is the story on our housing-related exposures. Another area of focus is commercial real estate. We have $35 billion of exposure to CMBS pools and $10 billion of exposure to CDOs of commercial real estate collateral. In the CMBS pools, CMBS securities that have subordination built into them are referenced in a synthetic structure that we wrap with a second layer of deductible that enhances our position. Losses on individual mortgages in the CMBS are crystallized when the properties are foreclosed and liquidated. As these losses accumulate and when they cause losses to the CMBS tranches our deals reference, the deductible in our deal would be eroded.

To date, foreclosure activity has been trivial. While delinquencies continue to rise and frankly, we project that trend to continue for some quarters, none of our transactions are considered impaired based on our current forecasts. So the total impact to ABV of MBIA Insurance Corp.'s loss reserve and credit impairment was approximately $460 million on a pretax basis in the third quarter.

Turning now to the investment side. Realized losses and permanent impairments on balance sheet assets were $171 million. $91 million of these losses are associated with write-downs of assets we acquired in relation to two remediation efforts. In both cases, these structures are now consolidated on our GAAP balance sheet as variable interest entities or VIEs and in both cases, the recognized losses would have been greater had we not engaged in the remediation.

For geography, $50 million of the $91 million is included in other than temporary investments on the income statement, other than temporary impairments rather on the income statement and $41 million is in the realized losses line. Beyond these, we have $43 million of other than temporary impairments on assets in the ALM business primarily on assets that are subprime RMBS-related. We also had $35 million of realized losses on nearly $400 million of assets sales in the ALM portfolio.

Net losses on FX derivatives and hedging arrangements, excluding now the mark-to-market on insured credit derivatives, were $87 million pretax. The largest drivers were a $69 million loss in the ALM portfolio driven by an increase in value of our euro-denominated liabilities and $45 million of the increased value in warrants issued during our capital raise last year. That mark would appear in the corporate segment.

Offsetting these losses were solid pretax income from National Public Finance Guarantee Corporation, our US municipal bond insurance subsidiary. National had $132 million of pretax income in the quarter, which is pretty close to our expected run rate. It did have one significant addition to its loss reserves, $27 million for a student loan credit. The remaining components of pretax income were $86 million from the ALM portfolio, which is driven by debt buybacks and $38 million from MBIA Insurance Corp. In the ALM portfolio, we repurchased $193 million park amount of MTN for approximately $83 million, so the gain was $110 million.

Now I would like to turn and make some comments about our balance sheet position. We will start with MBIA Insurance Corp. It would be most helpful to depart now from GAAP and discuss the statutory balance sheet, which is summarized in our supplement on page 38. You should also know that our full statutory statements will be filed today.

The first thing to note is that, on the asset side, 37% of the assets are in the form of a loan to the ALM portfolio at the holding company. The loan does not have an amortization requirement, but the ALM portfolio is taking advantage of improved asset liquidity to begin retiring the debt. Since September 30, $100 million has been paid down.

The second thing you should know is that $1.5 billion of the $3.2 billion in invested assets on the balance sheet has in cash and short-term investments. In our press release, we had a $1.9 billion figure. It differs primarily because it includes the liquid assets of MBIA Insurance Corp.'s subsidiary. Our liquidity planning is based on this narrower definition.

We are keeping the portfolio highly liquid with the intent to ensure that all the near-term payments that we expect on our RMBS and CDO squared exposures are covered and covered with a cushion. The second lien RMBS payments are expected to decline substantially and they are the primary driver behind the illustration that we show on page 50 of this quarter's operating supplement. We have always expected that 2009 would be the peak period of payments on the second lien RMBS and we expect 2010 will be much less significant.

On the liability side, the first thing to look at is contingent liabilities, which are obviously not on the balance sheet itself. MBIA Corp.'s portfolio of insured risk was $232 billion at December 31, 2008 and is $215 billion now. And the decline is mostly due to the CDO and RMBS areas.

In the third quarter, we had four transactions to terminate in accordance with their terms, which reduces $2.1 billion of exposure. We also agreed in the quarter to reassume $3.5 billion of structured finance exposure from our reinsurers. Now, since the end of the quarter, we have agreed to two commutations with two counterparties, which eliminate another $2.1 billion of exposure. Those exposures have large potential liability.

Now onto the balance sheet liabilities, the first thing to notice, the loss in LAE reserves, the net balance sheet account is $546 million. Inside of this account, among other things, are three components that are related to our second lien RMBS deals. One, expected payment as mortgages are charged off, which is about $1.8 billion; two, excess interest in the securitizations that we expect to recover over time of $1.5 billion; and three, recoveries due to our putback rights, which are about $1.1 billion. These latter two effects, recoveries from excess interest and recoveries from our contractual rights against the seller servicers, are an offset to statutory reserves.

So doing the arithmetic, we are at the point now where the expected future recoveries are larger than the amounts we believe we have left to pay out. To that extent, if either losses paid or recoveries vary from our assumptions, our ultimate loss would change accordingly. The bottom line of this is that MBIA Corp. has a statutory capital base of $3.9 billion, $2.5 billion surplus, plus $1.4 billion of contingency reserves. Its invested assets were $5.2 billion on September 30 and claims paying resources were $7.1 billion versus its statutory loss reserves of $546 million.

For the ALM portfolio, it held $7.4 billion of book value assets at September 30 and $8.4 billion of book value liabilities, of which $2 billion is the secured loan from MBIA Insurance Corp. In addition, its liabilities include $600 million owed to the corporate segment, so liabilities owed to third parties total $5.8 billion. We expect that this book value deficit between the $7.4 billion book value assets and the $8.4 billion book value liabilities will be closed over time by repurchasing the debt of the portfolio at discount and by investing the asset portfolio more aggressively. We are actively pursuing the former and we are cautiously considering the latter.

The portfolio is expected to positive operating cash flow for the next several quarters and has seen over $700 million in market value improvement in its assets in the third quarter. As of September 30, it held $1.3 billion in cash and short-term investments, about $600 million of which is free cash. All of its putable GICs are currently collateralized with cash or high-grade liquid securities, so we believe the liquidity risk there is reasonably manageable.

At the holding company activities level, we held $409 million of cash and short-term investments at September 30. Its debt service and operating expenses are running about $30 million a quarter and it has debt maturities in 2010 and '11 that sum to $160 million. Its current resources and cash flow are enough to maintain its operations into about 2013.

Finally, in our National Public Finance subsidiary, we held $630 million in cash and short-term investments at September 30. We are taking steps to invest somewhat more aggressively in this portfolio while still holding at least a $300 million liquidity cushion. National Capital's position improves every quarter due to its strong earnings from operations and its declining portfolio. National started out life with capitalization at slightly less than the S&P AA level, but it is trending higher and it is solidly within the AA range today.

So those are the key facts to understanding how we lost $1 per share of value in the third quarter and the balance sheet position that gives us confidence that we will be around to grow our business in the future.

Before moving on to your questions, just one more comment on the subject of quarterly conference calls. With this call, we have now returned to a more traditional format and more traditional resources with Greg and I taking the call. However, we will continue to evaluate the effectiveness and the productivity. If you have an opinion about whether or not we should continue to hold quarterly calls, please let us know. Greg and his IR team have been extremely responsive to our investors, as well as to our management team and others and has agreed to participate in calls and meetings along with management with shareholders that have questions. And so to the extent that you have questions about things that are going on in the Company, please let IR know and we will handle them accordingly regardless of where we go with quarterly conference calls. And with that, we would like to open the floor to questions.

(Operator Instructions). Andrew Wessel, JPMorgan.

Good morning, thanks for taking my question. Just two, I guess one -- for the $7.4 billion of book value investments in the ALM business, what was the market value of that $7.4 billion?

About $5.9 billion. The OCI component in the ALM portfolio declined from June to September by about $700 million.

Great, thanks. (multiple speakers).

Improved.

Right, thank you. And then the other question I had was on the deferred tax asset, the $1.3 billion deferred tax asset. Now on a statutory basis, do you expect to be profitable in 2009?

I don't want to go into forward-looking statements about the fourth quarter at this point.

Okay, that's fair. I mean were you profitable through the first three quarters?

Through the three quarters on a taxable income basis, we do have a small NOL.

Small NOL. And then -- so that would -- there is a chance that -- I guess that is based on another question. But anyway so given that deferred tax asset, is there a kind of an outlook for profitability that makes that $1.3 billion recognizable here or kind of (multiple speakers) just by carrying it?

Yes, the answer is yes that we anticipate having adequate taxable income to absorb it in the future. A big part of the deferred tax asset is related to unrealized losses and we expect those unrealized losses to reverse. So they are sort of self-funding, if you will.

Great. Thanks.

Darin Arita, Deutsche Bank.

Thank you. Just a couple of questions here. First, with respect to National, there is some confidence expressed in the press release on the creation of that entity. Can you give us an update on what is happening there and give us a sense of timing on when that might be resolved?

Sure. National was created on February 17, 2009, so of course, it does exist today. There has been a series of litigations filed that challenge the decision of the Insurance Superintendent to permit the creation of National. They are ongoing. There is extensive disclosure about the progress of the litigation in the 10-Q. But just in terms of timing, Darin, obviously, it is litigation, it is hard to be very firm about timing. We would anticipate that our Article 78 action will be completed sometime in 2010. As it gets resolved, we will have to see what impact that has on other litigations.

All right. That's helpful. And in terms of the loss remediation efforts, can you talk about what further analysis MBIA has been able to do in the third quarter?

When you say loss remediation analysis, are you referring to the process of reviewing files on second lien RMBS that are subject to putback replacement rights?

That's correct.

Or something else? Okay. In the third quarter, we did review additional files. I think we went from about just under 24,000 reviewed to about 27,000 reviewed and the increases, the reason for the $76 million increase to the recoverable that we recorded in the quarter.

Okay. Thank you.

Arun Kumar, JPMorgan.

Good morning, Chuck. A couple of questions for you. One is in terms of your cash burn rate, if you look at what you paid out in the quarter, it is about $600 odd million offset by certain incoming cash sources. And if I look at your projections that you have on one of your slides, I think it is like 50 that shows your payout expected over the next several years, you actually expect to pay almost nothing out in 2013, '14 and '15. One is could you comment on that?

And secondly, if someone were to just extrapolate the quarterly payments that you made in Q3 and do that as a comparison to your cash and investments at the MBIA Insurance Company, like you have said correctly, with $3 odd billion of cash and investments and you are paying out this quarter at least probably a net amount of $400 million or so, can one make any kind of conclusion as to how long the insurance company will be able to continue to make payments on its own without other sources of funds? Would that be totally a question that is erroneous?

Mr. Diamond, your line is open.

Hello, can you hear me?

Hold one moment. Yes, Mr. Kumar, your line is open.

Oh, hi. I just asked a question. I will repeat the question. The question was related to the cash burn rate for MBIA Insurance Corporation going forward given that you paid out a net amount of $400 odd million in Q3 and given you have about $2.2 billion -- $3.2 billion of cash and invested assets at the holdco, how long do you think the insurance company has existing resources to continue to make payments?

Now I prefaced that question with page 50 of your handout or your supplement that shows that you expect to make little or no payments in 2011, '12 and '13.

I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience. Mr. Kumar, your line will remain open. Please hold.

They got dropped.

Mr. Diamond, your line is open.

Yes, hi. This is Arun Kumar. Is the call still on?

Yes, Mr. Kumar. We are experiencing technical difficulties with Mr. Diamond's line, so please hold.

Okay.

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

(Repeating)

Hello, are we together?

You are.

I believe we are.

Do we have Arun?

Yes, we do. Hi, Chuck, how are you?

Hi. Everyone else has been hanging on for the answer to Arun's question.

Do you want me to repeat the question or do you have it?

I have it. Thank you all for hanging on. Not clear what we just experienced. So the issue is do we think that MBIA Insurance Corp. has adequate resources to cover all of its liabilities? And the answer to that is yes; that continues to be true for a couple of reasons. One is when you think about its resources, you do have to look at both its balance sheet assets today, as well as the investment income and the installment premiums that it receives over time.

And then the other thing to consider is the payout expectations with respect to our liabilities and that is where perhaps the story is a little more interesting. And it is illustrated, as Arun suggested, on page 50 of the supplement and what you see happening basically is the period of maximum peak payments on our insured second lien RMBS trailing off after year-end 2009.

We have expected all along, based on the structure of those transactions, that 2009 would be the period of peak payments and they do fall off thereafter. The way they work is that as we -- as loans are charged off, we make payments that go into the waterfall in the securitizations and pay off the principle of the transaction.

So as you pay down the principal with a given set of loans that are going to -- that are going to default and be charged off, as you pay them out, you have more and more -- a larger proportion of the remaining securitizations made up of loans that are current and performing on which you capture excess interest.

So the excess interest offsets the cash outflows in our projections and as you can see on page 50, at some point, they actually turn, on average, positive. That is to say most of the loans that are going to default and be charged off and the securitizations have been paid off and you are receiving the excess interest from all of the performing loans that remain in securitization for their term.

Again, we show that graphically and in my prepared remarks, I tried to touch on that a bit and talk about the relative components of the reserve for second lien RMBS that includes payments that we expect to make in the future, which are about $1.8 billion, recoveries that we expect from excess interest, which is about $1.5 billion and then recoveries that we expect from the seller servicers. And we have talked before last quarter about how we arrive at that number, which currently is about $1.1 billion.

So the cash flows from the excess interest in the securitizations is actually coming in the door now, starting to come in the door now. Although obviously much of it is to be received in the future. And we have said that the recovery on our putback rights would occur about three years out. So it is with the impact of those things taking place that you see the actual payments falling dramatically into 2010. They become, if you will, negative payments or net receipts in late 2011.

Thanks. Just a quick follow-up on the other point you made in your press release that you commuted a transaction that had $1.2 billion in net par exposure for the payment of 93 and you said that the amount was less than the charge that you are taking. Could you comment on what the charge was, the loss reserve charge that you had booked set up for that particular item?

No, we don't typically disclose individual deal loss reserves or impairments.

Okay. Then a follow-up to regulatory discussions. I wanted to ask you about the regulatory viewpoint in terms of the continuing of the payment on the surplus notes that is costing you about $140 billion every year. Obviously, you have been current on that up to this point, but given actions with other companies in the recent past, could you comment on discussions you may or may not be having with the regulator in terms of payment of the surplus note coupon?

And the second thing is one of your competitors, Ambac, yesterday, in its 10-Q made comments about regulators taking a look at their payments and the balance sheet and so on and so forth. Could you comment on the status of discussions that you are having with the regulators, if any, related to the financial health of MBIA?

Yes, sure. First of all, we are not having any discussions with any regulators or anyone else about MBIA Insurance Corp. not paying its obligations as they come due and that is our expectation and that is what is built into all of the sort of forecasts and analyses that we are looking at and sharing with the regulators. So that is not a part of any discussions that we have been having.

And regarding the surplus notes, there is no discussion on that front as well?

There has been no discussion about the surplus note payment. The last payment was July 15. The next one is January 15, 2010.

And in terms of dividends, obviously capacity from the opco to the holdco, is there any? I know you have not taken much in terms of dividends from the opco to the holdco in the past I would say year and a half, almost two years now. Is there any intention to take any money up to the holdco or are you going to leave it all at the opco at this point?

Yes, we did have one dividend obviously in February of 2009 in conjunction with the transformation. The regulator goes through a very rigorous analysis to determine that it is reasonable and appropriate to pay that dividend. Having done that, we don't anticipate that we will pay any dividends from MBIA Insurance Corp. up to the holding company in 2009. And I also don't anticipate that we will pay any dividends from National up to the holding company in 2009.

As we go forward, I mean obviously we are expecting that our operating subsidiaries will be able to provide dividend flow to the holding company and that, over time, it will become clearer with respect to MBIA Insurance Corp. what its capacity is to pay dividends.

All right. Thank you.

(Operator Instructions). Donna Halverstadt, Goldman Sachs.

Good morning. Two quick questions for you. At one point, you made the comment that expected recoveries exceed what we think we have left to pay out. And I think that comment applied to your entire book of business, not just a certain subset of it. Is that correct, you were talking about your entire book of business?

No. Good morning. That comment is really specific to our second lien RMBS. If you look at the overall statutory reserve, it is positive or it's a reserve of $546 million. So net across the whole MBIA Insurance Corp. book of business, we expect to pay out present value $546 million.

Okay. The other thing I wanted to ask about, on the topic of NOL carrybacks going from two years to five years, do you expect a tax refund in 2010 and if so, what size?

Yes, the new law permits NOL carrybacks in 2008 and 2009 back five years. We did not have an NOL in 2008. At this point, we do. Through three quarters of 2009, we do have a small NOL, but not sufficient to absorb the entire $500 million of taxes paid in the five-year carryback period. And in fact, that is the amount that we are able to carry back to. The actual amount of taxes paid is a little bit greater than that. So we have $500 million of carryback capacity. We don't have nearly that amount of NOL in 2008, excuse me, in 2009 at this point.

Great. Thank you.

Terry Shu, Pioneer Investments.

Hi, going back to Darin's earlier question on the recovery, the $1.1 billion and you did increase it again in the current quarter. What is the confidence level that that will, in fact, come back to you? What is the process and I think Darin asked about the timing? You have booked it, but when do you actually receive it?

Yes, good question, Terry. The amount that we have booked is $1.1 billion on a stat basis. The amount that is increased in the third quarter is about $76 million. And our confidence level about recovering them is high because of, in fact, they are contractually due amounts. So we do expect that they will be recovered. We have litigation that is ongoing with some of the seller services that actually goes far beyond those contractual claims.

We believe that if we actually reviewed all 470,000 mortgage files that we would find that a very high proportion of them had the same characteristics as those that we have reviewed to date and that our ultimate recovery would be very much greater than the $1.1 billion that we have recorded to date.

But there is litigation ongoing where we are seeking to demonstrate that there is no need to review all 470,000 files and that it is self-evident that these transactions should be rescinded and that MBIA should be placed in the position that it was in prior to writing those insurance policies.

So that is the subject of the litigation. To predict the path of litigation that has that much money involved is very difficult. Our best guess, based on looking at our own experience and the experience of other large dollar amount commercial litigations, would suggest that about a three-year timeframe at the time that we set the recoveries in the second quarter. So we still believe that that is an appropriate estimate.

But there is -- the timing is not that much of an issue because it is not as if you're going to get in cash. These are just recovery estimates netted against future potential loss payments. Am I right?

No, on the contrary. We think that the amount of the recoveries is going to end up being --

Cash in?

Yes, by the time the cases are resolved, the amount of recovery will be greater than the amounts still to pay.

Okay.

And so we would anticipate that there would be a transfer of value of one kind or another.

Have you estimated how the cash flow works or how it is and is there some issue whether or not the servicers, in fact, have the financial wherewithal to pay? How do we gauge that when you talk about the confidence level?

Right. We have done a credit analysis on each of the seller servicers and we believe that they are all able to pay the amounts that we have currently recorded. And we believe that they will have an ability to pay our ultimate claims. Obviously for accounting purposes, we are only taking into account the amount that is related to files that we have actually reviewed already.

Right, right. And suffice it to say, we are really not going to know how it all plays out for a while. As you said, the path is upwards of two to three years, is that right, Chuck?

That would be my guess. Things may happen along the way that change our views, but it is likely that this type of litigation will take a meaningful amount of time to resolve.

Okay. Now the other litigation, the one challenging the formation of National. Again, I am not sure I fully understood the answer you gave to Darin. Is that like a next year event or is that also a drawnout event?

The central litigation related to our transformation on this -- we have referred to as the Article 78 proceeding in which a group of banks have challenged the decision-making process that the Superintendent of Insurance undertook when we approved the transformation. That proceeding is intended to be expeditious and therefore, we would anticipate that it gets resolved sometime in 2010. It is our hope that it is in the first half of 2010.

Who has said that it can be resolved expeditiously? The judge or is it some -- how does one know that?

All of the sort of legislative intent and I believe the language of the law that authorizes Article 78 proceedings indicate that it is -- they are intended to be expedited procedures. So the fact that the courts -- where there is a well-defined and comprehensive regulatory framework in the state, the Courts will tend to defer to the regulators in the absence of evidence that the regulators were arbitrary and capricious in their decision-making process. You would think that if they were arbitrary and capricious, it wouldn't take that long to demonstrate it.

Okay. So therein lies your confidence that you think that, because it is a regulatory decision and that Courts tend to side with regulators there, hence you are confident? Is that how -- is that the train of thought? I am not sure whether or not to have confidence one way or the other.

Terry, it probably wouldn't be fair to say necessarily that the Courts -- forgotten the exact words that you used -- side with the regulators. It is that the system of law is set up so that regulatory decisions can be challenged, but they can only be challenged if they are clearly based on an arbitrary and capricious process.

One could argue it was arbitrary because the people who are suing are saying that it is arbitrary, so it could be argued either way, no?

And that is the argument that the plaintiffs are saying the Superintendent was arbitrary and capricious. The Superintendent is saying, no, know I wasn't arbitrary and capricious and I have a whole record to demonstrate that that is the case. So I mean we think that having that to play out in front of a judge is a process that is unlikely to take years.

Right. But it is sort of hard to call because court cases are always hard to call. So I don't know how to assign odds, but suffice it to say, there is no clear-cut answer as to whether or not you will win or lose. Is that fair?

We are highly confident that we will prevail, Terry, but the timing, as you say, is hard to pin down.

Okay, thanks so much.

This concludes the Q&A session. Greg, your closing remarks?

Thank you, Christy and thanks to all of you who joined us for today's call. We apologize for the technical difficulties. Please contact me directly if you have any additional questions. I can be reached at area code 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 and goodbye.

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