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To: doug5y who wrote (21032)4/3/2005 10:18:12 PM
From: muwis123
   of 70368
The Third Avenue Fund has had that position for at least two years now.

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To: muwis123 who wrote (21030)4/4/2005 8:52:03 AM
From: Larry S.
   of 70368
Spreading the Risk?
Investigators hit MBIA, the big muni-bond insurer, with another round of subpoenas


THE PROBE INTO ABUSES of finite-risk reinsurance and other skulduggery has made American International Group the target of breathless coverage in the financial press. Already the four-decade boss of AIG, Maurice "Hank" Greenberg, and three associates have been forced to walk the plank. And Warren Buffett, often viewed as the conscience of American business, has been dragged into the affair and forced to deny that he had full knowledge of an apparently fraudulent reinsurance deal that one of his insurance units did with AIG.

But now the investigation, spearheaded by New York Attorney General Eliot Spitzer, the Securities and Exchange Commission and the U.S. Justice Department, is moving on a new front. Wednesday, Spitzer and the SEC hit giant municipal-bond and financial-guarantee insurer MBIA with a second round of subpoenas following their first requests for information in November. The stock closed Friday at 52.12, after falling to a 52-week low of 51.25 earlier in the day, amid fear that the company's triple-A debt rating, a sine qua non for a financial-rating enhancer like MBIA, could be in jeopardy.

The subpoenas asked for information relating to MBIA's accounting treatment of advisory fees, its methodology for determining loss and case reserves (reserves set up for troubled risks), instances of purchase of credit-default protection on itself and documents relating to Channel Reinsurance Ltd., a reinsurance company of which MBIA (ticker: MBI) is part-owner. The requests strike at the very heart of MBIA's business as the largest U.S. insurer of muni bonds and other instruments, totaling some $890 billion in insured par value and debt service at the end of 2004.
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The first round of subpoenas led MBIA last month to restate some six years of earnings, chopping reported net income from 1998 to 2001 by around $60 million. But these restatements were small change for a company that reported net income of $815 million, or $5.63 a share, last year. That restatement arose from a $70 million payment MBIA received from Converium (then called Zurich Reinsurance North America) in 1998, which at the time was depicted as a loss-reducing reinsurance recovery for MBIA, but was, in substance, a loan. Now, based on information obtained by Barron's, it appears that investigators are vastly increasing the scope of their probe, and that past and present executives at the Armonk, N.Y.-based company could face civil, and possibly even criminal, fraud charges.

The latest subpoenas may give some credence to criticism that MBIA has played fast and loose with its financials in delivering predictable double-digit earnings growth over much of its three decades of existence. A controversial 2002 report by hedge-fund operator Gotham Partners asserted that MBIA was overleveraged, deeply under-reserved against possible credit defaults and overly exposed to guaranteeing dicey structured financings in addition to plain-vanilla municipal bonds. Moreover, the report stated that the company routinely accelerated its recognition of current income by classifying many of its upfront guarantee fees as advisory fees taken at closing, rather than accounted for over the life of, say, the bonds insured.

Others with knowledge of MBIA's operations further contend that MBIA has artificially pumped up premium income and apparent portfolio credit quality by insuring bonds in the secondary market that are fetching prices lower than their stale credit ratings would dictate. Finally, some critics say that MBIA's low loss ratios (only three-hundredths of a percentage point over its 30 years of existence) may be testament more to a willingness to defer recognizing problems than to layers of excess collateral, other underwriting protection and its self-proclaimed prowess at restructurings.

The company has vociferously denied such charges. And its critics have mostly been cowed by the company's strong financial performance, at least until recently. Nonetheless, there appears to be a certain gap between the reality the company seeks to convey and the actual fact.

Table: MBIA1

What MBIA's troubles could mean for bond investors2.

MBIA executives affect an earnest, church-deacon manner when marketing their services to the modestly paid municipal and state finance officials, still the very lifeblood of MBIA's business. Company officials are instructed, for example, to drive unostentatious autos when making business calls. Yet several tool to work in expensive high-performance Porsches and fancy BMWs. Current Chairman Joseph "Jay" Brown for a time used a deep recess in the MBIA headquarters garage to store eight or so of his vintage sports cars, all swathed in specially fitted fabric covers when garaged.

MBIA's current regulatory problems arose from an incident in 1998, when a Pennsylvania hospital group called Allegheny Health, Education and Research Foundation (Aherf) declared bankruptcy, and MBIA was suddenly on the hook to pay some $320 million in principal and interest over the remaining life of bonds issued by an Aherf unit. The default was a public-relations disaster for MBIA, which had long touted its "zero-loss" underwriting record. For MBIA had made a rookie mistake, ignoring the government reimbursement problems then savaging big-city hospitals. Moreover, the insured bonds lacked even the minimal protection of a security interest in the mortgages of the facilities underlying them.

Worse, MBIA was faced with taking a huge charge that would result in its first quarterly loss ever. Among other things, the loss would likely cost MBIA's top management their full $36 million cash bonuses that year.

So MBIA, investigators suspect, hit on the scheme of covering the loss with a retroactive reinsurance policy, giving it a reinsurance recovery of $170 million to cover the present value of the future Aherf interest and principal payments. Result: MBIA could show a better than 40% jump in pretax income that year -- $565 million over what the income figure would have been without resort to the reinsurance.

The payment came from three European reinsurers, Axa Re Finance, Munich Re and Zurich Re (now Converium), with the first two anteing up $50 million apiece and Converium $70 million of the $170 million cash payout. The key was to structure the deal like bona fide reinsurance and not simply a loan, which would give MBIA no accounting offset to the $170 million hit from Aherf to its 1998 income statement. A loan, after all, is just another liability with interest costs that penalize income.

To pay back the three reinsurers, MBIA agreed to "cede," or give, them $297 million in future premium flows over the next six years on some $45 billion par value of issues underwritten by MBIA.

The key consideration for MBIA was that policies it was ceding had to transfer real risk of loss. Otherwise, the premiums flowing to the reinsurers would constitute just a loan repayment at a compounded interest rate of 9% to 10%.
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To: Paul Senior who wrote (21015)4/4/2005 9:57:38 AM
From: Spekulatius
   of 70368
re AIG - sold AIG and UVN flat this am.
Regarding AIG I felt that the risk reward ratio at 52$ was not sufficient given the current state of affairs. With respect to UVN I felt that the current valuation is not all that compelling, in the entertainement space i prefer to add to my small Via.b position.

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To: Spekulatius who wrote (21035)4/4/2005 10:20:09 AM
From: Larry S.
   of 70368
6 month chart of 2 "great" value stocksL AIG and MBI:

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To: Steve168 who wrote (21028)4/4/2005 11:28:22 AM
From: Paul Senior
   of 70368
Steve168. Not been a good time for small cap tech. I assume and hope it's a cyclical thing, and I am trying to hold on to my positions.

I'll still buy if I believe I see value:

For example, AVCI. Has again dropped below cash value+short term investments. No long term debt. Trading at about net current assets. (A negative is that these current assets are diminishing every year.) I've upped my position this morning.

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To: Paul Senior who wrote (21037)4/4/2005 12:29:43 PM
From: Suma
   of 70368
Paul what about no earnings for AVCI.. Do you negate that fact ?

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To: Suma who wrote (21038)4/4/2005 1:19:02 PM
From: Paul Senior
   of 70368
Yes, Suma. It's a statistical approach for me. I like to buy a package of these type companies (if I can find them) and hope the winners go up more than the losers fall. Only rarely do I find any of these companies to have earnings when I buy them. (Others though, perhaps Brinks for example, may have better success or screens in finding profitable ones.)

Some additional background info. for you:

In past I've tried to bring some judgment about the business or business prospects to the purchase decision - I have tried to evaluate why each of the companies seems to be so downtrodden and evaluate the prospect of a turnaround. I've been very wrong in some of my judgments. For example, I passed on SINA (a great Steve168 call!) which rose maybe 50x from where it sold below cash. I keep trying to avoid making judgments for stocks in this particular category (below cash plays), but I find it very difficult to stop myself from doing so.

Others will only buy if they have analyzed the company and prospects and believe they see opportunity or catalyst. Brinks and TPE is an example perhaps.

I've not kept good records of my performance here. I believe most of these stocks have worked out. Losses have occurred in one of three ways:
1.Company disintegrates - wiping out the investment.
2.I lose patience and sell too soon. (Patience is often required here: 2-3 years is reasonable.)
3.The gains are so small as to be insignificant - especially if the time value of money is considered. (Perhaps knowledge of the company's prospects and only picking one or a few of these companies lets an investor more confidently make bigger bets and get more profits than I do. That way is too risky or difficult for me though.)

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To: Steve168 who wrote (21027)4/4/2005 1:19:56 PM
From: Brinks
   of 70368
Steve Re: TFS

It's tough to know sometimes exactly what management will do. If there was value there you would have thought that management would bale and merge long before know. I guess it goes back to no matter how big a margin of safety one may believe they have the management of the company is the key ingredient. It takes a lot of time to evaluate management. Most don't do it because of time.

What a down slope:

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To: Paul Senior who wrote (21037)4/4/2005 9:17:22 PM
From: Steve168
   of 70368
Thanks Paul and Brinks for your reply.

The tech cycle is so dramatic - look at your AVCI from 40 down to 2 then jump to 20 in a year, now it is back to 3.8. Will it survive this time? If it can survive, then it could have another chance to go to 10 or 20.

Good luck,

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From: hoyasaxa4/4/2005 10:54:45 PM
   of 70368
Ramblings & A Question

Gas prices are up.
House prices are up.
Comic Book Prices are up.
I seem to be seeing a lot more penny stock pitches lately too.


So, where's the inflation? Sure seems like inflation to me.


Aren't rates bound to go up, house price appreciation to slow (whichever comes first)?

Not to mention the uncertainty regarding war, the stagnation of Europe, not "low" P/Es for sure and litigation hangovers and other macro threats to other industries (real estate bubble bursting, Spitzer's attack on insurance, big pharma drug withdrawls and lack of blockbuster creation)...

So, what's the positive story? A republican government (but what about spending), technology (nano? hyrbid cars? internet? cost savings?)? The US remains the best/safest place to invest (defecit?, dollar??

By the way, what's up with Berkshire Hathaway?


So Paul, Spek, brinks et all here's the $64 question: If you could invest in one fund or stock for your newborn boy's future (can't be cashed for 18 years) where would you invest?

-HoyaSaxa, new father, fully invested (top holdings Berkshire, Centerpoint Energy...20 other postions including Electronic Arts, Cendant, Disney).

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