We're right back to where we were a month ago. Danillo asking the same 8 banks to add capital in some shape or form to monolines to preserve AAA ratings.
"A forced splitting up of a bond insurer by a regulator such as the New York State Insurance Department would be an "extreme scenario" that would involve public hearings and litigation and take a long time to complete." http://www.marketwatch.com/news/sto...x?guid={C7D6CAA5-22FC-443B-9012-04EA8F0200E8}
Bond Insurer Plans a Split to Protect Ratings NYTimes By VIKAS BAJAJ Published: February 23, 2008 Ambac Financial Group, the embattled bond insurance company, plans to split itself in two in a bid to safeguard its top credit ratings and avert losses on securities that it guarantees for big banks. The company also hopes to raise $3 billion to bolster its finances, a person who has seen Ambacâs plans said Friday. An announcement could come as early as Monday, assuming credit ratings agencies approve the measures. News of the breakup plan, first reported by CNBC, sent the stock market soaring Friday afternoon. The Standard & Poorâs 500-stock index closed up 0.8 percent after being down as much as 1.2 percent earlier in the day. Financial shares paced the gains. Shares of Ambac jumped $1.48, or 16 percent, to $10.71. MBIA, a rival that has said it is considering a similar breakup plan, rose 2.4 percent, to $12.18. Under Ambacâs plan, one part of the company would guarantee relatively safe municipal bonds, while the other would insure more complex securities backed by mortgages and other debt. In all, Ambac guarantees about $556.2 billion of securities. The company also hopes to raise $2.5 billion through a rights offering to its existing shareholders; the sale will be backed by banks. Ambac also plans to raise roughly $500 million in new debt, according to the person who has seen the plan, who was not authorized to talk about it. The banks, which include Citigroup and UBS, delivered a draft of the plan to Ambac and credit ratings agencies on Friday, and the company is expected to give its formal consent soon. Officials involved in drafting the plan hope the two new subsidiaries will both receive triple-A ratings, though the firm backing mortgage-related bonds could be rated slightly lower. Fitch Ratings has already downgraded Ambacâs insurance business to double-A, though Moodyâs Investors Service and Standard & Poorâs still rate the firm triple-A. A spokeswoman for Ambac, Vandana Sharma, declined to comment on details of the plans. âWe continue to be in active negotiations as part of a lot of alternatives, which include a capital raise to stabilize our rating,â she said. A spokesman for Eric R. Dinallo, the New York insurance superintendent, also declined to discuss the plan, but issued a statement suggesting progress was being made. In January, Mr. Dinallo asked leading banks to inject more capital or provide lines of credit to the bond guarantors that would allow them to keep their top ratings. âAs insurance regulators, it is our responsibility to protect policyholders and ensure a healthy, competitive market for insurance products, and we are encouraged by any developments that further these goals in this important market,â the spokesman, Andy Mais, said. The idea of dividing the bond insurance companies has gained steam quickly. Just last week, Gov. Eliot Spitzer of New York told a Congressional committee that such a step would be pursued as a last resort if banks and the insurers could not come up with another solution. A day after Mr. Spitzer spoke, a smaller bond guarantor, Financial Guaranty Insurance Company, told New York regulators it would split its business in two. And this week, MBIA replaced its top executive with a former official who quickly endorsed the idea for that company. In embracing a split, the bond guarantors are tacitly admitting that their expansion into complex asset-backed securities has not gone well. Created in the 1970s, the insurance companies initially specialized in guaranteeing interest and principal payments on municipal debt that rarely defaulted. Today, about half of the $2.6 trillion municipal bond market is insured. But in the 1990s, as competition squeezed their profit margins, Ambac, MBIA and others moved to back bonds that were secured by mortgages, credit card receivables and other assets. During the recent housing boom, the companies also guaranteed more complex collateralized debt obligations, which are backed by portfolios of bonds. As defaults on mortgages and other debts have risen, investors and credit rating firms have begun to question whether guarantors have enough reserves to pay claims on their insurance contracts, particularly those backing mortgage-related securities. MBIA has raised $2.5 billion in the last four months, but Ambac has not yet raised any capital. In January, Ambacâs board replaced its chief executive because of a disagreement about whether the company needed more capital. Last week, the company also replaced its chief risk officer and other senior executives. A split of the insurance business would help the companies by allowing them to resume insuring municipal bonds, something the companies have been unable to do in recent months because investors have lost confidence in them. In the mortgage-related business, the companies are expected to manage existing contracts but not write many new policies, at least in the foreseeable future. That business is expected to be backed by relatively more capital than the municipal firm to account for higher future losses. The plan to shore up the guarantors is also critical for banks like Citibank, UBS and Merrill Lynch. If the firm that insures their collateralized debt obligations and other securities does not have a high credit rating and substantial capital, the banks would have to acknowledge substantial losses in their portfolios. Moodyâs estimates that 20 banks could collectively have to increase their reserves by $7 billion to $30 billion if the bond guarantors were downgraded.
"slightly lower" ? lol Looks like a patch and an ugly one at that. Basically just a last ditch effort to avoid month end downgrade armegeddon. Probably good news for muni market though. IF they can get agreement from ALL parties. But at the end of the day will existing shareholders sign off on this or force a run off? a 2.5 bil rights offering will completely dilute existing shareholders removing any meaninful equity upside. So many parties with conflicting interests may keep this in litigation beyond the the point of relevancy for the broader market. And what of FGIC MBIA SCA? Seems like the CDO writeoff train has already come of the tracks to make this isolated solution meaningful. That Channel RE news late friday will surely force MBIA to raise further capital or face downgrades.
Ambac Moves Closer To Raising $3 Billion By Karen Richardson wsj.com Bond insurer Ambac Financial Group Inc. inched closer over the weekend to an agreement with a consortium of banks on plans to restructure the company and raise roughly $3 billion of capital, according to people familiar with the matter. The most contentious issue continues to be a potential restructuring, which could effectively split Ambac's low-risk municipal-bond business from its riskier structured-finance business in a model known in finance circles as "good bank/bad bank." Ambac, the second-biggest insurer of bonds, guarantees the principal and interest payments on more than $550 billion in debt.
Flashback: Good Book, Bad Book Liz Moyer, 02.15.08, 2:30 PM ET Financial Guaranty Insurance Co. told New York State insurance regulators Friday it would file a formal request to split itself in half, creating a new company that would house its municipal bond business to shield it from steep losses in its credit derivatives operations. Financial Guaranty's (FGIC) proposal, "good book/bad book," is much like the "good bank/bad bank" scenarios regulators and bankers used in the late 1980s--and, previously, during the Depression--to stop system-wide bank failures due to exposure to bad real estate loans. The troubled assets were sliced out of the otherwise "good" bank and worked off while the good bank continued to operate. Discussed in theory on Thursday in a hearing on Capitol Hill, it's a plan regulators have been kicking around in recent weeks as they try to prevent the credit crisis from cascading through the $2.6 trillion municipal bond market. Another idea is to create a federal bond insurance corporation, modeled after the Federal Deposit Insurance Corporation, which insures the bank deposits from a bank collapse. The urgency to fix the bond insurers is mounting. Moody's Investors Service cut FGIC's financial strength ratings, as threatened, Thursday to single-A from triple-A, which takes the company out of the running as far as writing new business goes. Two other, bigger insurers, MBIA (nyse: MBE - news - people ) and Ambac Financial (nyse: ABK - news - people ) also face downgrades by Moody's. Ambac has already lost a triple-A rating from Fitch Ratings. At the hearing in the House financial services committee Thursday, New York Governor Eliot Spitzer said he expected a resolution in the next three to five days, lest regulators would have to step in. "The clock is ticking." Rep. Paul Kanjorski, D-Pa., who led the hearing, said other options include allowing the Federal Home Loan banks to back municipal bonds with letters of credit, eliminating the need for bond insurance. Those proposals seem unlikely to succeed, given the small number of bond insurers. Indeed, MBIA and Ambac chaffed at the idea of more regulation Thursday, telling the House finance committee they had the ability to pay claims. A good book/bad book scenario would not be palatable news for counterparties of the structured products backed by the bond insurers. Wall Street and other investors would also be caught holding losses under this scenario. Regulators seem unconcerned. Their interest: rescuing the municipal bond market, not banks or insurers. Already, issuers are facing sharply higher costs because of the fallout from the credit crunch. So-called "auction-rate securities," long-term bonds sold at auction frequently to set interest rates, are reeling from the crisis. At the Thursday hearing, Gov. Spitzer said a failed auction for the Port Authority of New York and New Jersey means that agency is now paying 20% on bonds, where it used to pay 4%. New York's insurance regulators said the municipal business of the bond insurers was a healthy business. "We could ensure that the funds paid by municipal governments would go to support their insurance and not pay for the problems in structured finance," said Eric Dinallo, state insurance superintendent, of the good book/bad book idea. Dinallo has been coordinating talks with Wall Street banks about the bond insurer crisis. Several ideas been floating around, including a $15 billion Wall Street bail-out of the bond insurers, the good book/bad book scenario and infusions of capital for individual insurers by groups of banks. FGIC had also been talking to banks, a group reportedly including Credit Agricole's Calyon division, Citigroup (nyse: C - news - people ), Barclays (nyse: BCS - news - people ), Société Générale and UBS (nyse: UBS - news - people ). It is owned by PMI--a mortgage insurer with problems of its own--and the private equity groups Blackstone Group (nyse: BX - news - people ) and Cypress Group. Bond insurers like FGIC used to focus solely on insuring municipal issues, but since 2003 have jumped enthusiastically into insuring structured products like collateralized debt obligations. Those products, loaded with exposure to subprime mortgages and leveraged corporate bonds, have declined sharply in value, potentially triggering claims the overleveraged insurers would have to pay. MBIA has been raising capital, including a $1 billion injection from Warburg Pincus and via the sale of more than $2 billion in securities. But other insurers haven't been able to raise capital. Ambac called off a plan to do so. Earlier this week, Warren Buffett, the chairman of Berkshire Hathaway (nyse: BRKA - news - people ), proposed to re-insure $800 billion worth of municipal bond insurance written by Ambac, MBIA and FGIC--at a steep premium. The insurers balked at the prospect of being left holding the bad structured-product book. Banks have massive exposure to the bond insurers as counterparties--to the tune of $70 billion by some estimates--but have been slow to come up with a plan to preserve the insurers from slipping into run-off. Merrill Lynch (nyse: MER - news - people ) and Canadian Imperial Bank of Commerce (nyse: CM - news - people ) wrote down $3 billion and $2 billion, respectively, in counterparty exposure to ACA Financial, which was downgraded to junk status in December. Some say the finance industry should be taking its lumps now to prevent this from happening in the future. "The municipal bond problem will work itself out," says Burt Ely, a bank regulatory consultant in Alexandria, Va. "Hopefully some of the lessons of this fiasco will be remembered for more than just three years."
Gasparino says word is they are waiting on Rating Agencies to rate the deal AAA. But the real question is: Even if the rating agencies give it a AAA now will they reconsider their ratings endlessly on every step down in the housing market?
The monoline clock is ticking By Francesco Guerrera, Aline van Duyn and Ben White Published: February 21 2008 18:10 | Last updated: February 21 2008 18:10 The poker game whose outcome could break the $2,400bn bond insurance industry and saddle Wall Street with billions of dollars in losses began in a drab, windowless room in downtown New York at 11 am on January 23. Wall Street is often accused of having a short memory but few bankers have forgotten the evening of September 23, 1998, write Francesco Guerrera and Aline Van Duyn. On that day, senior executives from 16 commercial and investment banks convened in a wood-panelled room at the New York Federal Reserve and agreed to put up more than $3.5bn to rescue Long Term Capital Management, failing hedge fund Long-Term Capital Management. That extraordinary meeting â was called by the then president of the New York Fed William McDonough William McDonough, then president of the New York Fed, amid rising concerns that an LTCM collapse would endanger the entire financial system - is. The meeting is still etched on Wall Streetâs collective imagination. Since then, bankers look at emergency gatherings in times of crisis with suspicion, fearing that being herded in a room with regulators may result in the pain, and expense, of an LTCM-style bail-out. That is why, when Eric Dinallo, New Yorkâs insurance regulator, called in Wall Street banks to discuss the mounting problems of monoline insurers last month, many of the participants looked at the move as both momentous and troubling. Mr Dinallo says he did not call for a bail-out of the insurers. But to the executives sitting around the table, the parallels with that pivotal meeting a decade ago were all too apparent. Even the mooted white knight for the monolines â Warren Buffett â was the same as during the LTCM crisis. Wall Street has been so scarred by those events that other regulators have been careful not to arrange collective gatherings of bankers. In August, when the Fed wanted to encourage banks to borrow from a newly expanded âliquidity windowâ aimed at easing the credit crunch, it deliberately set up a conference call to avoid any comparisons with that fateful September evening. Gathered around the large brown wooden table, under the watchful gaze of past insurance watchdogs, whose austere pictures hang in a neat row along each of its the walls, were representatives of some of the worldâs largest banks. Their host was Eric Dinallo, the fast-talking New York insurance superintendent, who had called the emergency meeting after growing increasingly concerned at the deteriorating health of bond insurers like Ambac and MBIA. As the credit squeeze began gripping this previously-quiet recess of the insurance market, Mr Dinallo wanted to take action before credit rating agencies downgraded one of big âmonoline insurersâ, averting a potential domino effect that could hit investors, municipal governments and Wall Street banks. Mr Dinallo was so concerned with the possibility of an imminent downgrade that, during the previous holiday weekend, he had cut short a skiing break in the Berkshires, a scenic but unglamorous area on the northern edges of the state of New York, to make some urgent calls. His intelligence was that, if no action were taken, a credit rating agency could strip a monoline insurer of its coveted triple-A rating within a week. On Monday, January 21, when Americans celebrate Martin Luther King Day, he met Ajit Jain, the quietly-spoken head of the insurance division of Warren Buffettâs Berkshire Hathaway. He asked Mr Jain to put a price on the municipal bonds guaranteed by the bond insurers, knowing that he needed some backup plan to protect this sector in the event of downgrades. He also called a number of senior executives at banks. According to Mr Dinallo, not a single person he spoke to before the meeting said he should not hold it. Some, however, said they would not be able to attend because they were in Davos for the annual shoulder-rubbing extravaganza of the World Economic Forum. In the status-obsessed world of Wall Street, it was decided that, because not all the CEOs would be able to attend, the Wednesday meeting would be attended by chief financial officers and chief risk officers. As the executives converged on Mr Dinalloâs offices, a nondescript building on Beaver Street, around the corner from the New York Stock Exchange, the superintendent was visibly nervous. He did not know the executives, and they did not know him. Wall Street was more used to dealing, if anything, with Treasury and Federal Reserve officials. A quick Google search done before the meeting would have highlighted that Mr Dinallo was appointed by Eliot Spitzer, now governor of New York but who, as attorney general, was a thorn in Wall Streetâs side during his aggressive probes of banksâ equity research. Indeed, before entering the meeting room, the executives were greeted by two large pictures hanging over the reception area: Mr Spitzer and Mr Dinallo, side by side. Mr Dinallo knew this was one of the most important meetings of his career, which has spanned public service, working with Mr Spitzer during his aggressive probe of equity research, and the private sector, with spells at Morgan Stanley and the insurance broker Willis. âThe purpose of the meeting was to flag up the problems that could develop if the ratings of the bond insurers were cut,â Mr Dinallo said in an interview. âI talked about a lot of things, including company by company approaches, equity infusions, flip-over structures, back-up lines of credit, back-stopped rights offering and the good bank, bad bank concept should the ratings fall. I then asked, what do you think?â Mr Dinalloâs words were at first greeted with complete silence from the banksâ representatives. Mr Dinallo said he had not appreciated how reticent banks would be to discuss the problem in the abstract in front on their competitors. âI had subsequent private phone calls with everyone, and I realised there are a lot of potential issues and other complexities for each of the banks,â he said. Some senior bank executives have privately said they were shocked by the meeting. How were the banks to determine who should contribute to saving the industry and how much when their exposures to the monolines varied so dramatically? And several of the banks had capital problems of their own following big writedowns on mortgage-related securities. Where would they get the money to come up with a bailout? Since then, talks have continued around the clock to find a solution, aided by Perella Weinberg, hired by Mr Dinallo as his advisor. One person closely involved said that Mr Dinallo is having to manage a âcesspool of vested interests.â On one side, a group of banks led by Citigroupâs new chief executive Vikram Pandit has been pushing to work out a deal for Ambac, to which Citibank is most exposed. A deal is expected to be imminent. Merrill Lynch, one of the banks most exposed to MBIA, was at first reluctant to step in, according to several people involved in discussions. Yet even John Thain, chief executive, told the FT the meeting has raised interest in the bond insurance sector on the part of investors including private equity groups and specialists in distressed companies. In the meantime, the clock continues to tick. FGIC has already lost its top-notch ratings. Ambac and MBIA, the biggest bond insurers, are likely to have another week or so to come up with a firm plan. The political spotlight has started to shine more brightly on the crisis as municipal borrowers throughout the US face soaring interest rates and buyers of municipal bonds are facing losses. Mr Buffettâs offer to take over $800bn of municipal bonds, revealed by him just days before a Congressional meeting on the subject, was hailed by Mr Spitzer as evidence that action was being taken to protect municipalities. William Ackman, the well-know âshortâ in the bond insurers, has been putting out highly cricitical research and information about the companies and their losses. Sovereign wealth funds, private equity investors like Wilbur Ross, and senior bankers have been regular visitors to Mr Dinalloâs offices. When it is Mr Dinalloâs turn as a former superintendent to have his picture hung on the conference room wall, he will be the best-know insurance regulator Wall Street has known. Whether it is fame or infamy depends on which hand wins the game. Copyright The Financial Times Limited 2008
ABK AMBAC Fincl: Any AMBAC Financial Group deal would likely be early next week, according to person briefed on the matter - Reuters (10.76 +0.05) -Update- lots of hype, no substance.