Third Avenue Sues MBIA

While Marty Whitman was given a few soundbites in reports about Third Avenue's litigation against MBIA, as a reader here you may be interested in reading more--direct from the source.

What, exactly, does the Complaint against MBIA allege?

The Complaint alleges, among other things, that the recent corporate “transformation” announced by MBIA, Inc. (“MBIA”) was illegal and was accomplished without due consideration in an attempt to defraud holders of MBIA Insurance Corporation’s debt.

The Complaint describes how the Third Avenue Funds purchased notes issued by MBIA Insurance Corporation in February 2008 (the “Surplus Notes”) based upon the balance sheet of that entity and representations that this and other capital raises would be conducted to recapitalize and revitalize MBIA Insurance Corporation following losses in its structured finance insurance business.

Little more than a year later, however, MBIA announced that MBIA Insurance Corporation was transferring approximately $5 billion in cash and its entire profitable domestic public finance business to another entity (MBIA Insurance Corporation of Illinois) that has no obligation under the Surplus Notes...

The Complaint asserts that these transfers have left MBIA Insurance Corporation only with “toxic” structured finance and credit derivative insurance liabilities and a credit rating that was downgraded deep into junk territory. The Complaint asserts that, as a result, MBIA Insurance Corp now has no viable business or earnings. The Complaint alleges that these transfers were illegal and unfair and resulted in damages to the Third Avenue Funds’ investment in the Surplus Notes. Third Avenue seeks an unwinding of the transfers discussed above or the award of appropriate monetary damages.

What are Marty Whitman's personal thoughts on the matter?

“We are now being improperly denied the benefit of our investment – namely, a well-capitalized insurance company that is able to conduct a profitable business insuring municipal bonds,” said Mr. Whitman. “MBIA has stripped that business away from us and left us with a run-off portfolio that is likely worthless.

Ironically, MBIA is now in the marketplace attempting to raise capital for the new entity, despite Third Avenue’s bad experience with MBIA’s last capital raise, which has given rise to this litigation,” he continued.

Does this have any relation to your portfolio--today or in the future?

Actually, even if you don't have money invested with Third Avenue, or MBIA, it does. The question of who you are investing your money with is a crucially important part of investing--as important at times as looking at the balance sheet.

How do you judge managers though? Are there any good rules of thumb that help you in determining another's credibility?

I have already posted some of my own but would love to hear your own thoughts on this, or any books you might have read on the subject.