Annals of research transparency, JP Morgan/MBIA edition

By Felix Salmon
August 11, 2009
quarterly report, the insurer has a book value of $2.8 billion, or about $13 per share. JP Morgan analysts Andrew Wessel and Daniel Kim beg to disagree, quite violently: in a note issued this morning they said that MBIA's tangible book value is actually negative, to the tune of about -$40 per share. Downgrading MBIA to "Underperform", in an action which has helped to send MBIA's stock down 14% today, they write:

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According to MBIA’s latest quarterly report, the insurer has a book value of $2.8 billion, or about $13 per share. JP Morgan analysts Andrew Wessel and Daniel Kim beg to disagree, quite violently: in a note issued this morning they said that MBIA’s tangible book value is actually negative, to the tune of about -$40 per share. Downgrading MBIA to “Underperform”, in an action which has helped to send MBIA’s stock down 14% today, they write:

Although we believe it will be some time before cash at the HoldCo runs out, it is difficult to envision a scenario where there is much capital remaining for shareholders given expected future losses at the consolidated operating company.

The report comes with three pages of disclosures and fine print, including three “Important Disclosures” about the fact that MBIA (a) is or was a client of JP Morgan; (b) will or might pay investment-banking fees to JP Morgan in the next three months; and (c) has paid non-investment-banking fees to JP Morgan in the past 12 months.

The report also covers the substantial legal risk facing MBIA:

Purchasers of credit protection and insured bond holders are suing MBI due to its good bank/bad bank split, which left structured and international obligations with significantly less capital to cover future claims. The plaintiffs argue they purchased protection based on consolidated capital levels, and the transfer must be reversed, as that would no longer be the case. We believe the outcome of this suit is also highly uncertain, and could have serious negative impacts on MBI if it were to lose.

It’s definitely a little weird, then, as an MBIA spokesman pointed out to me this morning, that nowhere in the report do JP Morgan’s analysts disclose that JP Morgan itself is one of the plaintiffs in that suit.

This is why disclosures — especially in a rules-based system like the one we’ve got — are never going to solve anything. There’s a whole slew of things wrong with them:

  • They’re almost universally ignored by people reading the reports.
  • They’re used by banks as a CYA mechanism, rather than as a way of imparting important information.
  • They’re written in a legalistic and deliberately uninformative way: there’s no way of telling, for instance, whether JP Morgan’s fees from MBIA are significant or not.
  • They leave out the kind of information which any disclosure written in good faith by a human being would put front and center — like JP Morgan’s involvement in the lawsuit against MBIA.

I’m not accusing Wessel and Kim of acting in bad faith here — after all, the lawsuit was filed in May, and their downgrade came only in August; what’s more, the downgrade doesn’t really help JP Morgan’s cause. But there is a certain lack of transparency to their report, which could be (and is, by MBIA) viewed as a conflict of interest. After all, a lot of the arguments they make in their note are substantially identical to the arguments made in the JP Morgan lawsuit. Especially since they specifically cite the lawsuit as a risk factor facing MBIA, would it have killed them to have noted that JP Morgan was one of the plaintiffs?

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