At some point in his life, MBIA CFO Chuck Chaplin probably made a conscious decision that he didn’t want to be called Charlie. But like his near-namesake, he’s carrying on a scrappy one-man fight against a seemingly relentless trend — in this case, modern accounting’s penchant for fair-value measurement.
Caught in the cogs of fair value accounting, Chaplin gets cranky.
In a letter today to the Wall Street Journal, Chaplin shot back at the Journal’s “Heard on the Street” column. Last Tuesday, that column compared MBIA’s earnings announcement — which included a metric that excluded fair-value losses — to the so-called EBBS, or “earnings before bad stuff,” pro forma measures that characterized the dot-com boom.
As CFO.com reported last week, MBIA complained in its earnings release that fair-value accounting losses painted a distorted view of the insurance company’s situation. “While attention-getting,” the company said in a press release, “the mark-to-market loss does not accurately indicate actual or expected losses. In addition, mark-to-market losses, except for the impairment, do not affect the insurance company’s statutory capital or rating agency capital requirements.” (MBIA has a triple-A credit rating, which it bolstered during the quarter by raising $2.6 billion in additional capital.)
In the column, Journal reporter David Reilly scoffed at MBIA’s proposed “analytic adjusted book value” metric, which valued the company at $24 a share, noting that its GAAP-based book value was $8.70, and that the market was actually valuing the company at $9.85 the day before the announcement. “A better name for this measure might have been SEEMM, or ‘shareholders equity excluding mortgage mess,’” Reilly wrote.
In his response today, Chaplin defended the metric, saying the company had offered a “sober and detailed” report of expected losses. “The alternative valuation methodology we presented made no attempt to dismiss GAAP book value . . . . In fact, the alternative valuation supplemented it.” Chaplin said that MBIA was offering investors more information, adding that “it strikes us as a bit condescending for you to think that investors are unable to consider varying assessments of valuation presented to them at the same time and reach their own conclusions.”
Chaplin also continued to question the relevance of fair-value accounting for MBIA, “which must report changes in the market value of its insured credit derivatives despite the absence of an actual market for them.” Chaplin has repeatedly noted that, unlike the liabilities of banks, the contingent liabilities of insurance companies aren’t usually tradable, nor is the company likely to be subjected to accelerated payments. “We believe that the mark has little relevance when attempting to put a value on our company,” Chaplin wrote.
As for the comparison to the dot-com boom, Chaplin said, “We have a 35-year track record and generated $257 million in cash from operating activities last quarter. Sound similar to Pets.com to you?”