Mitchell I. Sonkin - Head of Insured Portfolio Management
Analyst · Elliot
Thank you Cliff, good afternoon. I'm Mitch Sonkin, Head of MBIA's Insured Portfolio Management division. I am going to spend the bulk of our time today on the two sectors that have experienced significant stress for last several quarters. U.S. residential mortgage backed securities, specifically our prime secondary book and our multi sector CDO book. I will address the performance issues in those books, provide detail on the loss reserve and impairment numbers Chuck mentioned earlier and discussed our outlook for those sectors, before I get into those areas, however, a few general comments. First MBIA's overall $668 billion insured portfolio, this position satisfactorily apart from the two sectors we are going to discuss. Second, despite the current economy and market conditions, areas that would be considered potential contingent sectors such as consumer auto, credit card, student loans and CMBS are holding up well. You'll note in the appendix of this presentation, we summarized the performance in those sectors and generally we are seeing acceptable performance. But we are certainly seeing some increases in delinquencies as you would expect in this environment, we see no material causes for concern. Third, overall, we maintain a strong and diverse portfolio. 83% is rated A or better. We have a highly diversified portfolio based on asset class issuer in service in geography and vintage. And, last we achieved successful completion of several high profile remediations in 2007 among them Eurotunnel and then EETCs in the legacy airline bankruptcies of North Western Delta. We believe our surveillance and work out teams have proven to be the best in the business with the skill, expertise and experience that gives us not only great confidence on our estimates, but in our inability to create remediation opportunities anywhere they exist. So, as we begin our discussion, our focus is un-affect, but our primary portfolio stress is limited to U.S. RMBS related sectors both directly and indirectly through the CDO exposures. With that, we'll turn to slide 24. I would like to frame our discussion on the RMBS and multi sector CDO portfolios by highlighting the reserves and impairments we took this quarter. First, in the multi sector CDOs, we took 595 million in permanent impairments to 5 high grade and 1 mezzanine cash flow CDO related primarily to performing trends and projections of inner ABS CDO collateral and stressed RMBS collateral. We increased impairments on our three currently impaired CDO squared multi-sector deals by 232 million, which now totals 432 million of impairments reflecting projected credit events that will impact the majority of the 2006 and 2007 vintage inner ABS CDO collateral. We feel comfortable with the rest of the multi sector CDO squared book. We now have a total of 1 billion of permanent impairments related to the multi sector CDO book, which I will get into more detail on shortly. On the RMBS second lien exposure, we took 495 million in new net case loss reserves related primarily closed-end second performance deterioration. We now have a total of about 1.1 billion of net case loss reserves related to our second lien portfolio. It is important to know, why we took these reserves and impairments this quarter and there are two main reasons. One, MBIA has attempted to identify and set impairments and reserves on all multi-sector CDOs and secondly in deals, where losses are probable and estimable related to the current housing crisis. We wanted to take those losses and impairments from now, even on CDO deals, where we may not pay any claims for at least 10 years, because we felt it was important to do our best to identify all of our material issues now as we feel quite strangely about our views. Second, when you consider the losses we took for the quarter, we have taken a view on the housing market that there will be stress at current levels through mid to end 2009 and that ABS CDO collateral will default at high rates over the next few years. Therefore we feel we have a handle on the outflows related to the second lien portfolio and the multi-sector CDO squares over that period, and so future material increases to reserves and impairments would require events significantly challenging our core assumptions being provided today. Now with that as a foundation for our discussion, let's start by reviewing our direct RMBS portfolio and then we will address the multi-sector CDOs. So please join me on page 25. I would like to start our review of MBIA's backward sector analysis with our $38.4 billion direct RMBS portfolio. These are individual investment grade mortgage-backed securitizations and do not include any RMBS collateral within our CDO book of business, which I will address later. The decrease in our exposure from year end is due to a combination of amortization, and we also reclassified one German multi-family housing deal with a net par outstanding of $1.6 billion, that was classified as a HELOC into a commercial real estate category, which is why the HELOC decline was a little more dramatic than it is. If you look at the slide, you will see that we separate our RMBS exposure in four areas. First subprime, which includes international covered bond deals and capital relieve trades and first lien alt A. Second, direct subprime, third prime HELOC, and fourth, closed-end seconds. And the prime HELOC and closed-end seconds together comprise our second lien portfolio, which we'll be spending time discussing today. On MBIA's prime business, which is comprised of first and second lien mortgages to high quality borrowers with unblemished credit records, we concentrate on two areas: one, those international capital relief and covered bond transactions, which are supported by prime underlying collateral and a conservatively structured in our solid performers; and second, the prime home equity lines of credit in closed-end seconds. Both are what we refer to generally as the second lien portfolio. To distinguish, HELOCs are floating rate loans, which generally require interest only repayment for a period of time before amortizing, and closed-end seconds are fixed rate second rate mortgages, which generally amortize principle and interest from the asset. The reserves we have announced in the fourth quarter and the reserves we've taken this quarter directly pertain to the second lien portfolio and accordingly are the focus of our discussion today. Note, in the sub-prime business, MBIA has exclusively ramped only AAA underlying securities in the secondary market since 2004. Our exposures per deal are focused on the first lien product in our glandular usually under $100 million. This book is not showing any material signs of stress at this time. When dialing inon the performance of our $38.4 billion RMBS book, about $20 billion of the total net par outstanding represented by the prime and subprime book is not a material concern to us at this time, although we are watching it closely due to deal structures, performance and attachment points to protect MBIA's position. On our prime exposure, the total net par at March 31st of 15.4 billion includes international and alt A. Most of this exposure is international capital relief and covered bond deals as I have mentioned insured and above of levels with ample loss protection and these exposures are totaling $11.8 billion, are performing adequately. And our alt A exposure are $3.6 billion is one which we watch closely as there are market concerns over potential losses and severities. But it is important to note is that we've ramped the majority of the portfolio at AAA attachment levels and we did not play in pay option ARMs, which maybe considered the most volatile loan type in this space. So, we remain cautiously optimistic on this portfolio. We have a slide in the appendix showing current performance trends, enhancements and cumu losses to date. I am going to skip the prime HELOC and closed-end second categories and return to them in a moment, get a brief look that our subprime direct exposure. As I mentioned before, our total sub-prime book totals $4.2 billion. We provided you with slides in the appendix at pages 62 and 63 that takes a look at the asset quality metrics of the subprime book. You can see that subordination levels remains strong in these deals at this point. And MBIA remains cautiously optimistic that industry projected loss rates will not materially impact our rep trances. We provided insurance on first lien product only at the AAA class of subprime deal structures, since beginning of 2004, and we have almost zero 2007 exposure. We have focused on the top tier players and we have minimal indirect exposure to monoline subprime issuers, a number of which have experienced solvency issues in the current marketplace. So, when you look at the performing measures in the chart and consider home price declines in the flow of propensity, we utilize a roll for loss methodology meaning the percentages of each delinquency bucket rolling to defaults and stress recoveries to the tune of 50% to 70% loss severities. Based on our current analysis, MBIA would still maintain adequate credit enhancement all around on this portfolio in our stress cases. So, due to substantial subordination and our deal loss protection on these transactions, and the selective strategy we took towards direct subprime exposure, we consider risk of material loss on this book low although we certainly expect some down grade activity. Now returning towards HELOC closed-end second deals, this is the area in, which we are experiencing significant stress in our RMBS portfolio. As you will recall, MBIA enhanced in December 2007, net case loss reserves of $614 million directly related to two closed-end second in 12 HELOC transactions with a net par as of December 31st of $7.5 billion on deals, which were issued from 2005 to 2007. In addition we took a $200 million unallocated reserve related to future allocation to closed-end second deals. We have now added a total of $295 million to total second lien reserves, which now aggregate $1.1 billion. Please turn in to the next slide on page 26. This slide shows the vintage breakdown of MBIA's RMBS exposure. You can clearly see that subprime has not played the major part in our origination strategy and the international has been a solid flow area. However, when you look at 2005, '06, and '07, you will note that MBIA focused origination efforts primarily on prime HELOCs and closed-end second deals. We did this, because we felt it was a prime product, historical losses were minimal. We felt we were dealing with the best and most prudent originators. In short, the mix seemed to make sense. Obviously, we have learnt lessons from the amount of par we ensured and in the end found out that the type of borrow, we thought we were ultimately ensuring that being a 700 plus FICO or a prime quality borrower was not actually who we thought they were due to layered risk, which will get into shortly. Let's go the next slide, which gives a breakdown on the second lien portfolio. On this slide on page 27, you can see as we pointed in the last quarter, MBIA continues to focus its attention on prime HELOC enclosed and second portfolios because of the stress we are experiencing and projecting experience in these portfolios over the next few quarters. As shown on the slide, our net par outstanding per HELOC and closed-end seconds was $18.8 billion at the end of the first quarter. The breakdown is $10.1 billion of closed-end seconds and $8.7 billion of HELOC securitization. And the majority of these deals have been originated over the last two years. MBIA wrapped these deals on a primary basis reattached with the BBB, BBB minus level, and the corresponding rating on these transactions is and still remains AAA. MBIA only wrap prime quality HELOC enclosed and second deals. As I mentioned the weighted average FICO scores for HELOC and closed end seconds in 2006 was 706 and 719 respectively and the weighted average FICO scores in 2007 was 702 and 710 respectively. Historical loss levels were generally under 5%. In general, credit enhancement considered of over collateralization in excess spread. MBIAs top exposures for the closed-end second and HELOC represented our strategy of maintaining relationships with the top tier issuers and our numbers reflect this as seen on this chart. When you look at the net core outstanding countrywide, this 55% of the book, res cap 28% of the book, and Indymac at near 6% of the book, which in the aggregate totals about 89% of the second lien book. Now let's go to the next slide and examine the performance trends that lead to reserves we've taken on the second lien book. Please join me on slide 28. As we discussed last quarter, during last summer, we began to notice elevated delinquency levels on several 2005-2006 vintage HELOC transactions. Following the virtual shut down of the U.S. mortgage refinancing market as well as the decline in housing prices, our analysis indicated that certain 2005and 2006, and 2007 HELOC deals, we are experiencing performance characteristic including a rapid increase in delinquencies, an inability of access spread, which is interest from loans minus view in interest odd on the notes through outpaced loan charge offs and the failure of certain deals to either build or maintain required over collateralization or deal protection cushion targets. By quarter end, we had enough data in house and enough correlation among deals to take 614 million in net case loss reserves on 14 deals primarily HELOCs. As you may also remember, we took 200 million unallocated reserve to earmark for closed-end second deals, which at the time did not have data points to justify individual reserves, but were showing performance strength. This quarter, we were able to make the same assessment and model our expected losses on our closed-end second portfolio, as we were able to do last quarter with the HELOCs. Why now? A combination of items; first, simply because of the young advantage of the closed-end second portfolio, generally 68% was insured in 2007 versus the 2005, 2006 dominating vintage for the HELOCs, we needed to see how delinquencies were rolling to defaults and gain a better understanding of default drivers. Second, a combination of loan level performance data and issuer specific information helped us to determine our view. If you look on this slide, you can see the weighted average conditional default rate trends of the second lien book, clearly performance trends have been negative reflecting higher levels of delinquencies and default. In December, when we took the first loss reserves on the portfolio, not only were the HELOC CDR is trending significantly higher than the closed-end second deals to respond more consistency, see that negative consistency on overall performance on a deal-by-deal basis. The closed-end second portfolio has shown starting in December, further signs of deterioration that have now made it clear, that we should take reserves. One question we are always asked is to provide our assumptions when we take loss reserves, which we will do on the next slide, where I will show you, how we calculated our loss reserves on these deals. So, please turn to page 29. So, how did we come to our quarter one loss reserve numbers? In order to determine reserves for the targeted transactions, we have employed a multi step process, using various collateral performance scenarios to project losses. We feel that the HPA does not directly impact our loss severities, because we apply a 100% loss severity. We do feel however that a prolong period of housing price declines will manifest itself and increase defaults. We believe that our modeling methodology addresses this issue. So assumptions were made to determine the length of the housing market, downturn and recoveries. And we did not give any credit for recent interest rate cuts, increased Freddie, Fannie limits, proposed stimulus legislation or any recoveries. Loss limits were calculated as follows. Step one was to analyze the existing performance trends. To account for loans that were at least 30 days delinquent, we used issuer specific data to develop roll to loss rates. These roll for loss rates are essentially forcing losses out of the current delinquencies pipeline, essentially creating a conditional default rate. We then assumed a 100% loss severity, which would eliminate any recoveries because of housing price appreciation as well as to address declines in housing prices. This essentially covered the first six months of the deals as existing delinquencies were rolled to defaults and flush through the transactions. If you now go to the right side of box, step two is where we analyze future performance. For loses on loans that are current on a go forward basis, we calculated losses as follows. We took the current three month averaged conditional default rate to project defaults on a go-forward for month seven to the end of the deal, 2007 digit transactions were subject to be greater of the CDR calculated in step one I mentioned or the three months CDR, the greater of methodology was used so as not to let averages mass current performance trends. This CDR was then held constant for 12 month period. To consider how we treated home price stress and macro economics stress, note that we applied 100% loss severity to all defaults. To account for the elimination of lower quality borrowers in the pool and the returns to stability, we applied a burnout factor over a 12-month period. So in total, we increased CDRs for a period of 18 months and then over a succeeding 12-month period, we reduced the CDRs. We then applied the burnout factor, which would range from 50% to 100% with a floor in order to reflect to return to normalcy. Now, let's turn to slide 30 for the results of these exercises. And let's spend some time here. The result is that we are located $152 million of the $200 million reserve we took last quarter and took additional case reserves of $343 million for a total of $495 million in new case loss reserves primarily slated for four closed-end second deals and one hybrid deal, which consist of both closed and seconds and HELOCs. When you take the $640 million in case loss reserves, we took last quarter and $495 million this quarter. Our total reserves against the second lien book are approximately $1.1 billion. We provided for you a list of all of the second lien deals that we are taking loss reserves on and the claims we have paid through March 31 on all those transactions in the appendix on page 65. From October to March, we paid about $152 million in claims on second lien deals. Slide 66 in the appendix shows the monthly claims payment trends we have made through the end of the first quarter based upon our modeling, we have actually paid out less in claims than we have projected at this point. But it is this timing, where we have estimated conservatively; only time will tell. But it is important takeaway for you that we do feel confident that we have modeled the expected outflows over the next 18 months to two years, so that we would not need to take any material, additional reserves, unless the housing crisis extends basically another year or so beyond our current assumption. We have also provided for you in the appendix, starting on page 67 a brief case study of our country wide HELOC portfolio and what's driving the losses. It is very clear what patents have emerged, low documentation and high CLTVs are driving losses. When you look at the level of losses being driven by reduced documentation, it is clear to us that a combination of underwriting and the actual borrowers, who received these loans, clearly were not necessarily, who they pretended to be. And the macro economic environment has exacerbated the situation for borrowers, who were stretched to begin with, feeling that with their property values, potentially under water walking away has become an option. Based on these trends however, we do have hope that we'll review burnout of elevated losses, once the febrile [ph] pig goes through the snake. And we are left with a more stable group of borrowers. So where dose that leave us? We feel confident that we have circled all the deals, that have potential material issuesthat is about 57% of the entire $18.8 billion, second lien book, that has a loss reserve posted to it. The majority of the remaining portfolio is either pre-2005 dealsthat are performing adequately with a few '06 and '07 deals that we have our eyes on, but are performing adequately to-date. When you look at the reserveswe have taken to the insured part of our impaired transactions and considered the deal structure, loss timing and excess spread, the reserve total to about 10%, deal loss severity to the net $11.5 billion, net par exposure of the deals we have reserved against. Cumulative loss rates on second lien collateral pools that support those exposures range in general from 15% to 35% with some outliers experiencing cumulative collateral pool losses of 40% to 60%. Let me address why we are comfortable with the results. We believe we've assumed a reasonably long elevated stress period. From a housing price and recovery standpoint, we are looking at a multi year down market, with elevated defaults throughout this period. We performed extremely detailed analysis on each deal and we utilize third parties for verification of certain key assumptions as well as loss projections. Given the nature of our claims on these deals, our parity payments, we expect to be paying the vast majority of these claims, over the next two to three years, before we start saying material recoveries. An obvious question would be what if the market downturn extends beyond our estimates. Well let's assume that we are off, and that the market downturn extends longer. If we extended our elevated CDR stress period by six months and extended the burnout period to 18 to 24 months instead of 12, what would happen? The answer is the $1.1 billion and estimated losses we project could increase by 54% to $1.7 billion. In any event while no can be certain of the outcome of the current housing crisis, we do believe that our stress losses will be inside the rating agencies stress loss assumptions against, which we hold collateral. So, let's turn to our outlook on slide 31. You can see from our modeling methodology and loss reserves, we feel that the downturn in the housing market will be with us for 2008 and 2009. But the second lien portfolio provides an additional wrinkle of issues for us because of the junior lien status of the loans, the uncertainty surrounding, ultimately how layered risks will play out in the long run and the lack of historical perspective for these trends on what we thought were prime quality second liens. To sum up our RMBS reserves, of the $38.4 billion RMBS book, $18.8 billion is second lien that's the HELOC and the closed-end second, of which we have 19 deals totaling $11.5 billion against which we have taken a total of 1.1 billion in reserves; $495 million in this quarter, $614 million in the fourth quarter. The breakdown of these deals we've reserved against is once again in the appendix on page 67. That's said, we've attempted to surround all the deals in the book, where we expect material deterioration and to set reserves now, rather than bleed out reserves over time based upon a consistent methodology applied across the book. We believe we have a solid handle and potential outflows and would expect no material increases to reserves on this portfolio for at least the rest of the year, probably into the first or second quarter of next year, assuming things do not get substantially worse. Now, let's turn to slide 32 for my final thoughts in this part of the presentation, I want to end this section with a very important point, one which we have not talked about in detail before in this space and that's remediation. The loss reserve numbers we have taken assume zero recovery from any type of remediations or enforcement of our remedies. I do not believe that will be the result however. For those of you aware of our remediation history, we intend to remediate these fields as vigorously as our past successes and to use every right and remedy and tool at our exposure. We have had teams of forensic experts that worked for several months reviewing many loans examining whether they should have qualified to have been included in our insured exposures in the first place. To summarize, we believe we have a case for material financial compensation based upon the diligence we and our advisors having performed so far. We also feel strongly, that the nature of our belief is based on strong and incurable facts. We are pursuing this effort; we expect substantial recoveries although I will not estimate those now. If you now will join me on slide 33, we will review and discuss our other sector of concern, multi-sector CDOs. Let's start by reviewing MBIA's overall CDO portfolio. MBIA's 129.6 billion CDO exposure is primarily classified into five collateral types only one of which is experience stress related to the U.S. subprime mortgage prices, the multi-sector CDO portfolio of $30.7 billion. Let me first describe the four collateral types we have in our $129.6 billion CDO book in orders to put all this in context. First, we have investment grade portfolio... corporate portfolio of 43 billion, which is performed as expected, and nearly all this exposure is currently rated AAA and the vast majority is at super senior level. In other words, MBI's risk attaches at some multiple of the AAA subordination level and we do not currently expect any material credit deterioration for the book. The high yield portfolio of $13.4 billion is largely comprised of low leverage middle market special opportunity CLOs, broadly syndicated bank CLOs and older vintage corporate high yield bonds. Deals in this category are diversified by both vintage and geography with European and U.S. collateral, and approximately 71% is rated AAA and 98% is AA or better. Likewise, we do not currently expect any material credit deterioration to this book. The commercial real estate CDO or CMBS portfolio of $42.3 billion is a diversified global portfolio of high quality and highly rated structured deals in the global commercial real estate sector. 32.5 billion of our net exposure in this sector is to structure CMBS pools that are not truly CDOs. Almost all this exposure is currently rated AAA. We do not currently expect any material credit deterioration to this book, and we have some slides on performance in the appendix showing the composition of the book and the low delinquencies that the book is experiencing. Last, the $30.7 billion multi sector CDO book, which includes multi sector CDO squareds is where we are experiencing stress related to the U.S. subprime mortgage crisis. So, let's go to the next slide, where we can breakout the multi sector CDO book and outline the impairments we've taken this quarter. Turning to slide 34, we provided breakout of the $30.7 billion multi sector CDO portfolio along with total credit impairments on that portfolio as of the end of the first quarter and associated mark-to-market. As a reminder, the collateral and MBIA's multi-sector CDOs include asset backed securities, for example, securitizations of order receivables and credit cards. Commercial mortgage backed securities, other CDOs in various types of residential mortgage backed securities including prime and subprime RMBS. This range of asset classes is down throughout the entire $30.7 billion multi sector CDO portfolio, which is comprised of deals that rely on underlying collateral originally rated single layer above high grade CDOs and in deals that rely in collateral primarily originated BBB mezzanine CDOs. New let's walk through the impairments we've taken on the $30.7 billion multi-sector CDO book. At December 31st, MBIA recorded $200 million in impairment charges related to three diversified CDOs of high grade CDOs or what we refer to a CDO squared deals that possess the largest bucket of inner CDOs of ABS collateral, to vintage being of the 2006 and 2007 years. We have increased that impairment to $432 million reflecting our views or the projected performance of the CDO of the ABS collateral within the deals. We believe we have a solid handle on the potential losses on these deals now, which I'll discuss further in a minute. This quarter, we also took permanent impairments to five high grade and one mezzanine cash flow CDO totaling $595 million. Despite the fact that we won't be paying interest claims on these deals for many years and principal isn't due until legal final maturity, which is typically three, five years out, we have decided to take these impairments now due to our views on the future performance on the inner ABS CDO collateral in the high-grade deals and the RMBS performance in the mezzanine deal. Again, I want to emphasize an important takeaway. While we have created impairments of $595 million on these five high-grade and one mezzanine multi-sector CDO deals, we do not expect to pay any interest on these claims, on these deals for 10 years or more based on our current analysis. So in total we now have a little more than $1 billion in impairments against the $30.6 billion multi-sector CDO book. We believe that these impairments reflect the potential future losses, we could experience and certainly reflect a position on ABS CDOs vis-à-vis defaults that have not manifested itself yet, but we expect it will come over the coming few years. We do not expect to take future material impairments on this book for the foreseeable future. Please turn to slide 35 and lets a take closer look at what was behind some of the impairments we took. Here we list CDOs, we took impairments on and you'll notice several facts. First there has been an erosion in subordination. Second, the high-grade deals generally represent the deals with the largest inner ABS CDO bucket versus original subordination and we expect material defaults to those collateral buckets, which is the primary driver of the impairments we are taking. Third, regarding the mezzanine deal that exposure is a principle and interest cap payable in 2053 there in MPV basis we've essentially written that exposure out. The slide shows the projected inner CDO fogs, which we believe will occur over a five year period, although quite frontloaded. In examining the RMBS collateral, we run various scenarios based on roll-to-loss methodology with a timing default curve that is punitive for 12 to 18 months before burning out to a normalize level. Prepayments speeds range from 10% to 15% and in our modeling that we used to assist us in setting current impairments, cumulative loss ranges are from 16% to 20% to the 2006 and 2007 subprime collateral resulting from our modeling. Of course the question results what is subprime losses are worst within our current expectations, and what could that use to potential impairments. Well we believe we have stressed the inner CDO collateral adequately, but if were to increase our to roll-to-loss assumption resulting in losses to subprime in the 18% to 23% range, and we mute the benefits of excess spread later in the curve, our impairments to the high-grade deals of $595 million could essentially doubled. As far as claims payment timing, this is a longer turn payout product. We generally don't project interest claims for 10 years and principal payment would not be required until legal final maturity, which as I had outlined before is generally 45 years out. Now let's look at the multi-sector CDOs squares in the same manner on the next slide. On slide 36 we will discuss our multi-sector CDO square deals of $8.6 billion where we have taken $432 million of impairments against three transactions. MBIA CDOs of high-grade CDOs are diversified transaction generally anchored by CLOs which are collaterized loan obligations consisting of investment grade corporate debt and containing pockets of other collateral, which may include highly rated tranches of CDOs of ABS collateral. No one transaction contains more than 40% of CDOs of ABS collateral as a percentage of the total collateral base. An important point to note on this slide is that the deals are diversified by collateral and vintage, with 42% originated from 2005 and prior, 32% from 2006 and 26% from 2007. The underlying collateral ratings as of the end of the quarter remains strong with approximately 64% of the underlying collateral rated AAA, 13% AA, 7% A, 4% BBB and 12%, below investment grade. Unlike the rest of the multi-sector book where we generally paid timely interest and ultimate principle at maturity, for the multi-sector CDO squared deals, when the deductible erodes, we'd start paying claims thereafter on individual pieces of collateral, not on the deal, but the individual pieces of collateral, after a contractual collateral settlement period. So we project starting to pay claims next year through the subsequent five years. When people look at the multi-sector CDO squared book, we often read about outrageous loss ranges in the $45 billion range or higher, associated with the portfolio, where they assume that the whole portfolio is comprised of ABS CDO collateral. It is not, as you can see by the collateral breakdown on the chart. We got the collateral breakdown in the appendix for you, if you, if the corporate market were to materially deteriorate, clearly we could face additional impairments on both the currently impaired transactions and potentially other transactions besides the ones we are mentioning today. However, the corporate collateral on these deals which is predominantly highly rated CLO tranches, continues to perform solidly and we expect no material issues on the collateral this time. This is important to note when you consider true loss potential to MBIA. Now let's turn to page 37, to discuss impairments on the portfolio. Last quarter, we discussed our impairment analysis and we determined that three deals within this segment would eventually be impaired which we initially quantified to be $200 million. As I have already mentioned we have increased the impairments on these three deals by $230 million, to a total of $432 million or as our analysis on the inner ABS CDO collateral has been refined based on our views of material impairments of that collateral within the three deals. You can see in the slide that we have projected defaults on large percentages of the inner ABS CDO buckets in these deals with the balance being generally older vintage CDOs which we believe will perform. In these three deals which totaled $3.1 billion as with the majority of our multi-sector CDO squared book, asset performance is guaranteed versus the normal MBIA guarantee of liabilities, in other words, these are deductible deals. MBIAs obligation to paying net losses is only until the deductibles' fully eroded in each subsequent asset experience of credit event is valued. So when you are look at the loss payment timeline, which we've outlined and as I mentioned before, we start to expect plenty of claims next year into the subsequent five years or so. If you wanted to take to further stress to the multi-sector CDO squares we've already impaired by increasing the loss of the remaining ABS CDO collateral and the smaller RMBS buckets in those deals. We have estimated a stress range of $100 million to $300 million. Therefore when you combine the doubling of the impairments related to the high-grade deals mentioned previously and take the high range of additional stress with multi-sector CDO squares, you would increase our $1 billion in multi-sector impairments to $1.6 billion to $1.9 billion. So to sum up on the CDOs, the total book $130.6 billion, of that multi-sectors are $30.7 billion including the multi-sector CDOs squared of $8.6 billion. Against that book we have taken total impairments of $1 billion, $27 million, $200 million in the fourth quarter $827 million in the first quarter. And of the total impairments, $432 million are on three multi-sector CDO squares and the balance of $595 million are on five high-grade and one mezzanine multi-sector deal. To turn page slide... turn to slide 38, I want to emphasize again the position that MBI has in our insured deals because the remains misconceptions about potential impact to our liquidity, based upon some misunderstandings about deal liquidation potential in the CDO book. In all cases, MBIA cannot be accelerated against, and we maintain the right as controlling party within our deals to accelerate at our sole discretion. Acceleration is an additional cash diversion remedy which re-directs cash away from subordinate tranches and funnels it, to accelerate amortization of our senior exposure. Acceleration is distinct from liquidation of the collateral pool which we also direct upon certain events of default, as the sole controlling party within our deals. To emphasize this point, the only way deal liquidates is if we decide to do it, otherwise we pay according to the policy which will be many years in the future for the bulk of the multi-sector book and after deductible erosion for the multi-sector CDO squared. Please turn to page 39. Briefly, this slide summarizes our outlook. We certainly believe the rating agencies will continue to downgrade collateral and that the ABS CDO mezzanine trenches with 2006 and 2007 subprime RMBS collateral will under perform. We are actively monitoring these deals and ensuring all rights and remedies are being properly administered. As we've attempted to take impairments on the deals we have identified at the highest potential issues; that the highest potential issues in an effort to provide clarity to our views within this book. Now let me finish by briefly turning to slide 40, and talk about what we were trying to do under the remediation side to these deals and some activity that happened after quarter ended. We terminated two multi-sector deals in April, with net par outstanding of $825 million contractually and without dispute which we do as a positive vis-à-vis enforcements of our CDS contracts. We moved management to five deals during the quarter to a new manager who we believe has refined and embarked on future remediation strategies will be the best positions to assist us in taking advantage of the market opportunities. Reveals [ph] to have a payment blocker language which means upon an event of default of cash all cash gets converted into the senior tranche, we have a very high success rate of enforcing that remedy demonstrating the quality of our deal documentation and structural provisions. We haven't had the issues others may have in enforcing our rights here. And finally, we continue dialogue with our various counterparties about other potential remediation and market opportunities which are ongoing. This concludes my portion of our presentation. We designed this presentation to try to answers many questions as we have received on our RMBS and CDO book. We have provided slides in the appendix as we supplement to the general date, that we are releasing in this quarter, which provides core performance data on our subprime and Alt-A books, as well as summarizes our comfort with our commercial real estate and consumer books. And we have also attempted to provide you insight into out views and analytical processes on the two stress segments of our otherwise solid performing book and importantly try to take reserves and impairments with the hopes of eliminating future losses today in order to provide more certainty to future quarters results and demonstrate our identification of problematic credits. We believe, we understand the scope of the losses we will face, and we'll undertake remedial efforts to ultimately reduce those losses. Thank you.
Joseph (Jay) W. Brown - Chairman and Chief Executive Officer: Thank you, Mitch. If you want to pull up slide 42, Chuck used this slide earlier to explain the adjustments that he would apply in looking at the different screen of our reported book value and what he would characterize as our analytic adjusted book value. As a owner of MBIA since 1986, I have started this chart for the better part of two decades, and this to me has consistently represented the best way to think about the long-term value of your company. The important thing to understand when we look at this chart today, as the introduction as result of FAS-133 and our decision to enter the derivative market approximately a decade ago. The uncertainly associated with unrealized mark-to-market losses. The real question that you should always think about with MBIA is do we have an adequate provision for losses? Most of the other issues that you see rise, detailed questions about accounting, individual questions about transactions etcetera are ignoring the basic fact that the major issue in terms of valuation and the major issue in terms of you understanding what you might want to the value with the company, comes simply down to the question of what you expect our ultimate losses to be? If you look at where we are today in terms of the pricing and the stock as noted in our press release, essentially the market is estimating that we're going to see about $10 billion more in net present value pre-tax losses than what we've recognized today. We don't believe that, can I go to the wrap-up side? In conclusion of where we are, I think it's very clear that our belief is a bond insured, insurance remains extremely viable. As we look at our product and think about the demands in the U.S and throughout the globe in terms of additional infrastructure, those needs are large and they are growing. Equally important, bond insurance provides a money back guarantee, recipients of the more than $2 billion in claims, we will pay, will be good testimony to the value of our product. We think we are very well positioned today, we don't believe we have any issues whatsoever in the area of liquidity either our holding company, better asset managing company or either insurance company As such and based on where our prices today, we have no current plans to raise any additional equity for our company. Importantly because of where we are in the credit environment and particularly where we are in terms of the securities that we have to measure on a mark-to-market basis or contingent liabilities, you can expect that there will be volatility in the quarters ahead. We do believe that the underlying results will become clear and more stable as this year unfolds as we noted earlier this year and we do believe as we end the year, some of the volatility that we've experienced over the last 18 months would be significantly diminished from where we are today. I think with that, I'll turn it over to Greg to start through the question and answer period.
