MBIA mixed up in CDOs, shares crumble; investors give ECHO 110%; big day for closings

By Evan Weinberger

New York, Dec. 20 - It turns out MBIA Inc. was hiding a little something on its balance sheet. OK, maybe a big something.

Late Wednesday, the world's largest bond insurer told the world that it had exposure to $30.6 billion in mortgage-backed securities that it insures.

Included in that $30.6 billion is an $8.1 billion exposure to collateralized debt obligations (CDOs), and in that number is a significant exposure to CDOs squared - CDOs backed by other CDOs.

MBIA has a market capitalization of $6.5 billion, according to Reuters.

So much for the Armonk, N.Y.-based bond insurer's reputation for conservative investing.

"What does it mean to be AAA?" asked one market watcher. "You're really rating not how things are doing now; you're really doing stress testing."

The exposure announcement puts private equity shop Warburg Pincus's planned $1 billion cash injection in MBIA at risk, warned Eagen-Jones Rating Co. The ratings agency said that the deal was predicated on there being no material adverse effect. The revelations about exposure to risky debt may prove to be just that, they said.

Morgan Stanley, which itself faced steep losses due to investments in mortgage-backed securities, was incensed. "We are shocked that management withheld this information for as long as it did," Morgan Stanley analysts Ken Zerbe and Yoana Koleva wrote in a report Thursday about MBIA's CDO squared debt exposure.

MBIA's AAA rating was upheld by Standard & Poor's Wednesday, but the company's outlook was changed to negative. The ratings agency said it took the CDO exposure into account when it performed its analysis. MBIA uses their AAA rating as an attraction for bond issuers.

The exposure revelations led the market watcher to question MBIA's rank within the AAA club. In his mind, a AAA rating means a company needs to be as close to treasury-note security as possible. "If you're wondering about those things, then by definition it's not AAA," he said.

Many investors questioned MBIA Thursday, and the company's stock dropped like a stone.

MBIA (NYSE: MBI) fell $7.07, or 26.17%, to close at $19.95 on the day.

The tough news out of MBIA and Bear Stearns' first ever quarterly loss were balanced by Oracle Corp.'s solid earnings, and stocks gyrated throughout the day. They ended up, however.

The Dow Jones Industrial Average picked up 38.37 points, or 0.29%, to close at 13,245.64.

The Nasdaq added 39.85 points, or 1.53%, for a 2,640.86 close.

And the S&P 500 gained 7.12 points, or 0.49%, for a 1,460.12 close.

Electronic Clearing House given 110%

Mountain View, Calif.-based small- and mid-size business financial services provider Intuit Inc. announced that it will acquire Electronic Clearing House Inc. (ECHO) in a deal totaling around $131 million Thursday.

ECHO is a Camarillo, Calif.-based payment processing company.

This is the second bite at the apple for the two companies, which had previously announced plans to merge in December 2006. That deal fell through in March.

"Since our last discussions with ECHO, we've continued to survey the market and believe today, as we did then, that ECHO is a great strategic fit for Intuit," Brad Smith, senior vice president and general manager of Intuit's small business group, said in a statement. "We expect ECHO's technology and operational assets will help us accelerate Intuit's growth and strengthen our expanding small business ecosystem that includes the fast-growing payments space."

The $17-per-share agreement is expected to close in the first quarter of 2008.

Investors gave ECHO stock (Nasdaq: ECHO) their all Thursday, and it leaped $8.69, or 110%, to $16.59 on the day.

Intuit stock (Nasdaq: INTU) picked up 34 cents, or 1.13%, to close Thursday at $30.43.

Manor Care pushing ahead

Regulators in West Virginia dropped the stay on private equity shop the Carlyle Group's $6.3 billion takeover of Toledo, Ohio-based nursing home operator Manor Care Inc. Thursday.

"With the notification received today from West Virginia, we have now completed this thorough and rigorous approval process and will close the transaction," Manor Care executive vice president and chief operating officer Stephen Guillard said in a statement. "As a private company, we will continue to provide the quality care that our patients and residents expect from us."

The Service Employees International Union says the deal needs approvals by regulators in seven more states.

Market sources tell Prospect News that the deal will go forward.

Manor Care stock (NYSE: HCR) gained 85 cents, or 1.29%, to close at $66.70 Thursday.

Closing day

Several long-discussed deals closed Thursday.

White Plains, N.Y., industrial conglomerate ITT Corp. closed its takeover of New York-based defense contractor EDO Corp.

ITT stock (NYSE: ITT) moved up $1.28, or 2.06%, to close at $63.28.

EDO stock (NYSE: EDO) slipped a penny, or 0.02%, to $55.99.

Hoofddorp, the Netherlands-based chemical producer Basell Holdings NV closed its merger with Houston-based chemical producer Lyondell Chemical Co.

Lyondell stock (NYSE: LYO) gained 17 cents, or 0.36%, to close at $47.97 Thursday.

And real estate developer Sam Zell's purchase of Chicago-based media conglomerate Tribune Co. closed Thursday. The company will now be private.

Tribune stock (NYSE: TRB) closed up 91 cents, or 2.75%, at $33.98, two cents shy of the $34-per-share purchase price.

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