From today's Barrons': "A week ago, MBIA (ticker: MBI) closed at 8.55, after sinking as low as 6.58 amid worries that the bond insurer and Ambac Financial (ABK) might lose their triple-A credit ratings. Our story (see "MBIA: Priced for Catastrophe," Jan. 21) said that even in run-off -- writing no new business and merely staying open to service old claims -- MBIA might be worth as much as 40. The stock soared last week, doubling in price by Wednesday, before settling back to around 14. Ambac also rallied. Word came last week that astute private investor Wilbur Ross is negotiating to buy Ambac. MBIA is a week or so away from getting $500 million in new capital from private-equity firm Warburg Pincus, with another $500 million capital to follow from a rights offering. Then, too, New York State Insurance Superintendent Eric Dinallo talked with various major banks about providing some $15 billion in backing. Despite initial reports to the contrary, the funds wouldn't be invested in the two companies, thus drowning shareholders with dilution. The money instead would be a backup line of credit, which more than likely would never be drawn on given the two insurers' formidable claims-paying ability and the long, decorous pay-back schedules that bond insurers typically meet. Certainly Wilbur Ross and Warburg aren't particularly worried over Ambac and MBIA's financial health. Any new bank financing back-up would be all to the good, in their estimation by instilling investor confidence in the companies and encouraging the credit-rating agencies to keep MBIA and restore Ambac to triple-A status. The credit line would constitute financial shock and awe, in other words." -- Jonathan R. Laing
My dad has been in commercial insurance for 55 years and says he never understood how the financial monolines were accorded the status of "impossible to fail" by the markets. Ten years ago he told me the muni ins market had never been tested. He also describes AIG as "an octopus with reinsurance ceded and receeded, each time generating a commission" The idea that the monolines reinsure each other, and use their insuance sub to wrap much of their own investment bond portfolio is just kinda funny, and scary. An ABK or MBI downgrade will yield higher property taxes as many muni issuers will be forced to pay marginally higher rates. I have heard FSA is getting ALL of the muni wrap business, but they have exposure through Dexia to ABK. I questioned a muni bond attorney and he has some level of concern about a "doomsday scenario" where the downgrades force the sale of non AAA bonds, and cause writedowns of existing portfolios at insurance companies and banks.
If this is all dinallo plan I cant possible see how that would work. he is asking the banks to take credit risk with little upside but very big downside, maybe im missing something but this is like an subprime arm homeowner with little savings, lots of expenses under threat of losing his home then the FHA goes to Banc of America and says 'can you extend a credit line on top of the mortgage they owe you so he can make payments?', the banks that arent in this mess wont get in, the banks that ARE might TOO not get involved to not risk further losses