MBIA Inc. will burn through its cash in a little more than two years and not much is likely to be left for shareholders, a JPMorgan analyst wrote in a report yesterday.

The report knocked the Armonk, N.Y.-based bond insurer's shares down 12.6%, halting a torrid rally in the company's stock.

JPMorgan analyst Andrew Wessel downgraded MBIA to "Underweight" from "Neutral."

Without raising new money, the holding company for MBIA will tear through its $430 million cash hoard by the fourth quarter of 2011, according to Wessel.

Considering the company is not writing new business and would have an "enormous" excess of liabilities over assets if not for certain doubtful accounting assumptions, "we believe there is little to support the stock price at the current level," Wessel said.

Before this report, MBIA's stock was up 47% for the month. The company posted an $894.7 million profit for the second quarter, leading to a rebound in equity - or assets in excess of liabilities - to $2.78 billion, or $13.38 per share.

Wessel said the accounting methods producing that figure are dubious.

First, MBIA is assuming it will recover $1.1 billion through lawsuits against Countrywide Financial and ResCap.

The insurer accuses these mortgage lenders of piling bad home loans into the trusts that became residential mortgage-backed securities.

After the loans defaulted and MBIA paid claims, the company now asserts it is entitled to compensation because the loans were not eligible for the deals.

Wessel called the accounting for the $1.1 billion recovery as a receivable and therefore an asset "aggressive" because the outcome is uncertain.

MBIA has also reported $14 billion in gains on its derivatives because of an accounting quirk that treats the erosion of a company's credit quality as a reduction in liabilities.

Although the decrease in the value of liabilities lifts equity, Wessel said the true value of this boost is nil.

The reduction in the value of MBIA's liabilities communicates a greater chance the company itself will default, in which case its stock would be worthless anyway, he said.

Without these two pillars to equity, Wessel calculates MBIA's liabilities would eclipse its assets by $40.22 per share.

MBIA stock fell 78 cents to $5.39.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.