BAILOUT? - New York Insurance Superintendent watching bond insurers, may intervene

Dinallo was on CNBC. Barely could put two words together. Making it up as he goes along.

He is in over his head. This is going to get very ugly.

 

One of the terrorists (FGIC) has decided to release its hostages (agreed to split into 2, thus releasing its hostages, the Muni Bonds). Now we wait on the other terrorist groups (MBIA, AMBAC).

 

I wonder how that affects the owner of the company when the 'bad' part is forced to file for bankruptcy

 

How do they split the equity in the companies based on munis vs the rest??

 

ABK CEO on Fast Money says considering splitting company like FGIC.


Another guy who sounds clueless.

 

Regulator in crisis talks to save bond insurers
By Aline van Duyn in New York

Published: February 15 2008 22:00 | Last updated: February 15 2008 22:00

New York’s insurance regulator will hold talks this weekend with sovereign wealth funds, Warren Buffett and other investors in an urgent effort to stabilise credit ratings on $220bn of municipal bonds guaranteed by the Financial Guaranty Insurance Company, the troubled insurer.

FGIC, which lost its triple-A credit rating this week, has asked the New York insurance regulator to allow it to split its municipal bond business from its riskier activities, which involve guaranteeing more complex “structured” securities, some backed by payments from subprime mortgages.

“In the coming days, we will have discussions about how to deal with capitalising the good book [of FGIC],” said Eric Dinallo, New York’s insurance superintendent, who has been leading efforts to push for the recapitalisation of FGIC and its larger competitors, Ambac and MBIA.


“I have a line outside my door for the good book, which includes Warren Buffett, private equity investors including Wilbur Ross and sovereign wealth funds. The good book may need recapitalisation or a back-stop credit facility to remain triple-A,” he told the Financial Times.

Eliot Spitzer, governor of New York and Mr Dinallo’s boss, said regulators also could push for a split of the businesses at Ambac and MBIA if they do not stave off credit rating downgrades. The business model of bond insurers depends on having a triple-A credit rating.

Any split of FGIC is expected to lead to losses for banks that have bought insurance from the company on mortgage-backed securities and collateralised debt obligations and that used it as a counterparty on derivatives positions.

The size of any bank losses will depend on the credit ratings of the “bad book” at FGIC. A group of banks including Calyon, investment banking arm of Credit Agricole; Citigroup; UBS; Societe Generale; Barclays; and BNP Paribas had been discussing a potential capital injection for FGIC. The group reflects the banks most exposed to the ratings losses.

“The reactions of the banks and other institutions that are counterparties for FGIC’s structured finance guarantees will be crucial in determining whether or not this plan will work,” said Donald Light, senior analyst with Celent, a Boston-based financial research firm. “Some may already see FGIC’s guarantees as worthless and have, or will soon, take the balance sheet hit. Others may fight this move.”

Mr Buffett this week revealed he had offered to take over $800bn of municipal debt guaranteed by Ambac, MBIA and FGIC. His insurance operations at Berkshire Hathaway have triple-A credit ratings. His company also has been licenced in New York to operate as a municipal bond insurer.

As at September 30, FGIC insured $31bn of mortgage-backed securities and $28bn of collateralized debt obligations.

 

http://www.cnbc.com/id/15840232?pla..._source=yahoo|headline|quote|video|&par=yahoo


Spitzer speaks about bond insuers on CNBC Mad Money.


Sounds like his only concern is the protection of muni holders.

He states that the Fed/Paulson should have acted sooner to protect the banks from losses but that now it was too late.

What a mess. Looks like a big wave of writedowns from banks on tap at the very least.

 

A Split-Up of Insurers of Bonds Is Considered

Regulators and bankers racing to bolster troubled bond insurance companies are considering splitting the firms into two parts: one for safe municipal debt and the other for riskier mortgage-related securities.


CNBC: Dinallo Confirms FGIC Move to Split Proponents of the idea say such a step could restore confidence in the financial markets broadly, and specifically in the $2.6 trillion municipal bond market, which provides financing for bridges, airports, museums and other civic projects. But the move would be unlikely to allay the worst fears about losses in mortgage-related securities, these officials acknowledge.

On Friday, one of the three big insurers, the Financial Guaranty Insurance Company, endorsed the idea, telling New York State regulators that it wanted to start a company that would inherit insurance contracts it has written on generally safe municipal bonds totaling about $224 billion. Its guarantees on about $72 billion in mortgage-related bonds, which analysts expect to suffer higher losses, would stay in the existing insurance company.

“It takes the whole thing out of the hypothetical and into reality,” Eric R. Dinallo, the New York State insurance superintendent, said in a telephone interview. On Thursday, he and Gov. Eliot Spitzer told Congress that they were considering encouraging a split in the insurance portfolios as a last resort.

Officials involved in negotiations on another insurer, the Ambac Financial Group, have also been discussing splitting that company’s insurance subsidiary in two, according to a person involved in the discussions who was not authorized to speak about them publicly.

If that plan goes forward, the banks involved would inject new capital into the firm that inherits the municipal business while the firm backing mortgage-related securities would keep much of the capital in the existing firm.

But the idea of dividing the companies’ insurance portfolios faces opposition from MBIA, the largest of the three insurers. Some large investment banks that have bought protection on mortgage-related securities from the insurers are also expected to oppose a split. The banks are worried that such a move would leave their insurance contracts backed by smaller and less financially stable companies that will not have a top triple-A rating.

It is unclear how the ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch Ratings — would react to a split and how they would rate the two resulting companies. In a statement released Friday, S.& P. voiced concern that dividing Financial Guaranty might leave some policyholders “disadvantaged.”

For several weeks now, Wall Street banks and the guarantors have been meeting at the urging of Mr. Dinallo, who wants the banks to inject more capital or provide loans that would forestall a downgrading of the firms’ triple-A ratings. Fitch has already downgraded Ambac, and Moody’s downgraded Financial Guaranty on Thursday.

At issue is whether the guarantors have enough capital to pay out the expected future losses on the bonds they have guaranteed. Until recently many analysts thought they did, but as defaults on mortgages have surged, many, including the ratings firms, have begun to question their previous assumptions. (MBIA and Ambac officials still assert that they have enough capital to cover future losses, which they say their critics have exaggerated.)

If the insurers lose their ratings, it would strip the implied triple-A rating from thousands of municipal bonds that carry protection from the firms, increasing the borrowing costs of cities, states and other issuers. Wall Street banks would also be forced to write down the value of mortgage securities they had protected through the guarantors.

The banks “are in a no-win situation,” said Donald Light, an insurance analyst at Celent, a research firm based in Boston. “They are going to have to salvage what they can.”

Mr. Light said a split held some appeal for the guarantors, because it would allow them to start writing insurance policies again on municipal bonds through a new firm that presumably would have a solid triple-A rating. In recent months, the guarantors have underwritten very little new business.

Splitting the portfolio “gives them a path to stay in business in their beloved and profitable original line of business of insuring municipal bonds,” he said.

The bond insurers declined to comment on Friday, though on Thursday, MBIA’s chief financial officer, Charles E. Chaplin, vigorously defended his company at a hearing in Congress and said it did not need any help.

If MBIA and Mr. Dinallo remain at odds over whether the company needs to do anything, the dispute could end in court, legal experts say. Mr. Dinallo has significant power as superintendent to take control of insurers if he believes there are not enough assets to pay claims by policyholders, but the company and its policyholders can fend him off if they can prove his decisions are “arbitrary and capricious,” said Francine L. Semaya, an insurance lawyer at the law firm of Cozen O’Connor.

Mr. Dinallo said on Friday that the negotiations with MBIA had not progressed as far as the talks involving Ambac and Financial Guaranty. “I feel optimistic that this Ambac consortium is doing real work — they are engaged,” he said. “I am optimistic that they will come to a private-side economic solution.”

Shares of MBIA fell 3 percent, to $12.24 on Friday, and Ambac fell 3 percent, to $10.22. Financial Guaranty is controlled by the PMI Group, the mortgage insurer, and the private equity firms Blackstone Group, Cypress Group and CIVC Partners.

 

heres the video of the hearing for those interested
http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht021408.shtml

 

Bond Insurer Split May Trigger Litigation, Bank of America Says

By Cecile Gutscher

Feb. 18 (Bloomberg) -- Regulators' plans to break up bond insurers into ``good'' businesses covering municipal debt and ``bad'' businesses liable to subprime-related losses may trigger ``years of litigation,'' Bank of America Corp. analysts said.

New York Insurance Department Superintendent Eric Dinallo and New York Governor Eliot Spitzer said last week that insurers may need to be divided if they can't raise enough capital to compensate for losses on subprime-mortgage guarantees. FGIC Corp., the fourth-largest of the so-called monoline insurers, asked to be split on Feb. 15 after Moody's Investors Service cut the Stamford, Connecticut-based company's top Aaa ranking.

``Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years.''

FGIC, owned by Blackstone Group LP and PMI Group Inc., insures about $314 billion of debt, including $220 billion in municipal bonds. The company said last week it applied for a license from New York state insurance regulators to create a standalone municipal company and separate the unit that guarantees subprime-mortgage bonds and related securities that led to rating downgrades.

New York-based Ambac Financial Group Inc., the second- largest bond insurer, may also seek a split, the Wall Street Journal reported today, citing a person familiar with the situation.

``The fact that one group of policy holders' exposures has imperiled the policies of the other does not mean they should forfeit the value of their claims altogether,'' the Bank of America analysts said.