Questions Submitted by Pershing Square Capital Management To MBIA In Advance of First Quarter 2008 Conference Call

May 12, 2008 2:00 PM EDT

NEW YORK--(BUSINESS WIRE)--

Pershing Square Capital Management, L.P. submitted the following questions for today's MBIA (NYSE : MBI) first quarter conference call:

    Question 1:

    Derivative Valuation Methodology

During the quarter, MBIA reduced its mark-to-market losses by $3.6 billion or by more than 50% by changing its valuation methodology to discount estimated future losses on CDS contracts at LIBOR plus MBIA Insurance Corp's credit default swap spread.

Why does the Company use MBIA's CDS spreads if the Company does not believe that MBIA's CDS spreads accurately reflect the Company's creditworthiness?

We note that in a letter to shareholders on March 10th, 2008, Mr. Brown explained away MBIA's wide CDS spreads: "CDS on MBIA is being used by banks and hedge funds to hedge direct or indirect exposures to other asset classes like RMBS and CDOs, and thus our spreads are being influenced by technical trading which does not really have any bearing on our real financial health."

What was the exact discount rate used to discount the mark-to-market losses? How does this rate compare to the discount rate used in Q4 2007? What would the loss have been under the prior methodology?

Is MBIA aware of any other financial guarantor that has discounted its CDS liability by discounting the loss using its own CDS spreads?

    Question 2:

    CMBS Exposure Methodology

According to the 10-Q, MBIA has changed the reference index used to calculate its mark-to-market losses on CMBS thereby reducing the loss for the quarter by $1.4 billion. The Company cites technical factors and illiquidity as reasons for abandoning the CMBX index and spread tables and deeming them to be "unreliable."

What index is MBIA now using to reduce its mark-to-market loss?

Why does MBIA abandon credit spread information that it deems unreliable in valuing CMBS, but as discussed in Question 1 above, uses its own credit spreads, which it believes to be unreliable, for the purpose of discounting its total mark-to-market losses?

Had MBIA used the previous quarter's methodology for CMBS and total mark-to-market losses, it appears that total mark-to-market losses for the quarter would have been $8.5 billion, i.e., $3.5 billion plus $3.6 billion plus $1.4 billion = $8.5 billion. Do you agree or disagree with this calculation? Please explain

    Question 3:

    Loss Reserves

Why does the Company believe it is appropriate to have an unallocated loss reserve of only $212.5 million or approximately 3 basis points of par exposure when the Company's incurred case basis loss activity was $613.5 million in Q4 2007 and $509 million in the first quarter?

Does the Company believe that there will be no further additions to case or unallocated reserves other than the Company's 14.5% of earned premium methodology? If so, why?

    Question 4:

    Claims Experience and Trends

The Company paid $108 million of claims in Q1 on 11 prime and near-prime home equity transactions. This was an increase in both the number and magnitude of claims from Q4 where the Company paid $44 million of claims on only 7 credits.

What is the Company's estimate for claims it will pay on prime and near prime home equity transactions in Q2, Q3, and the full-year 2008, 2009, and thereafter?

Why does the Company believe that the recent acceleration in number and size of losses is not a harbinger of greater losses in the future?

    Question 5:

    Changes to CDO Disclosure

In the earnings press release, the Company states that "In order to facilitate investors' understanding of its insured portfolio, the Company is substantially increasing its disclosures..."

While the Company states that its disclosures have improved, in fact, beginning this quarter, the Company no longer breaks out each CDO and the asset composition for each CDO, and instead now groups the CDOs by vintage year and reports asset composition as averages of the CDOs from that year. The result is substantially less disclosure for shareholders.

Why has the Company changed its reporting format?

Will the Company update its first quarter disclosure to provide at least the same level of disclosure as in previous quarters?

    Question 6:

    Cash and Liquidity Management

Jay Brown's May 6th Letter said: "We don't plan to deploy the $1.1 billion we raised in our last equity offering until we determine the optimal path to our long-term legal and operating structure and until we have achieved a stable target capitalization level in the insurance Company. Given the more than adequate liquidity in both our insurance and asset management businesses, there is no compelling reason to move this cash at this point."

In today's 10-Q, the Company now says: "After consultation with the NYSID, MBIA Inc. has decided to contribute $900 million of the proceeds of the February 13, 2008 public offering to its insurance subsidiaries, consistent with our previously announced capital strengthening plan to maintain our triple-A ratings and support our existing and future policyholders, in the next ten to thirty days."

    What changed in the Company's thinking between May 6th and today?

    Question 7:

    Collateral Posting Requirements

At March 31, the Company reported collateral posting requirements of $8.25 billion related to the holding Company's investment management division's asset/liability programs. The 10-Q compares this collateral requirement to $16.8 billion of "free collateral" at MBIA Corp. (the insurance subsidiary).

Is MBIA Insurance (the insurance subsidiary) posting its assets as collateral for the benefit of the holding Company's investment management operation? If so, what does it charge the holding Company for providing this collateral? It appears from the disclosure that if the financial strength rating of either the holding Company or insurance subsidiary were to decline, that the collateral posting requirements could exceed the free collateral available.

What does the insurance subsidiary charge the holding Company for providing guarantees for the benefit of the investment management subsidiary?

Can the Company explain the collateral posting requirements and their terms in more detail?

    Question 8:

    Credit Default Swap Exposure

On page 113 of MBIA's 10-K, there is a table which outlines MBIA's CDS exposure. The table states that MBIA's Insurance subsidiary has $200.402 billion of CDS notional exposure, yet MBIA's operating supplement states that this exposure is only $129.6 billion.

Please explain this discrepancy. What is the make up of the undisclosed $70 billion of CDS?

    Question 9:

    The Use of Offshore Reinsurance to Avoid U.S. Taxes

Mr. Jay Brown has publicly questioned the appropriateness of other U.S. financial guarantors reinsuring U.S. domestic financial guarantee insurance transactions with foreign affiliates without paying U.S. corporate taxes.

In light of the fact that MBIA reinsures domestic transactions with Channel Re, its Bermuda-based 17.4%-owned affiliate, whose only customer is MBIA, isn't Mr. Brown questioning MBIA's own practices?

    Question 10:

    Providing Data to Fitch

What is the downside to MBIA to providing Fitch with continued access to its internal files so that Fitch can properly assess MBIA's creditworthiness?

About Pershing Square Capital Management, L.P.

Pershing Square Capital Management, L.P., based in New York City, is an investment advisor to private investment funds with approximately $6.2 billion in capital under management.

Funds managed by Pershing and its affiliates own investments that are bearish on participants in the financial guaranty business including, but not limited to, MBIA and Ambac. These investments may include, without limitation, credit-default swaps and short sales of common stock.

Pershing manages funds that are in the business of trading - buying and selling - securities and credit default swaps. Pershing has and in the future may increase, decrease, dispose of, or change the form of its investment in the companies for any or no reason.

Source: Pershing Square Capital Management, L.P.

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