MarketWatch
February 14, 2008 10:45 AM ET
SAN FRANCISCO (MarketWatch) -- New York state's top insurance regulator suggested Thursday that bond insurers like Ambac Financial Group and MBIA Inc. could be split in two to protect municipal policyholders from problems in other parts of the companies' businesses.
Superintendent Eric Dinallo said his office has been discussing all options with bond insurers, but if necessary, the New York State Insurance Department will consider separating the companies' muni-bond businesses from their more troubled structured-finance units, which have exposure to complex mortgage-related securities known as collateralized debt obligations, or CDOs.
"We would ensure that the funds paid by municipal governments would go to support their insurance, and not pay for the problems in structured finance," Dinallo said, according to testimony prepared for a congressional hearing. "This plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds."
New York Gov. Eliot Spitzer and executives from Fitch Ratings, Ambac and MBIA are also due to testify during Thursday's House Financial Services subcommittee hearing on the state of the bond-insurance industry, which has hit hard by the mortgage crisis.
There's now concern that bond insurers have to pay big claims on guarantees they sold on mortgage-backed securities and CDOs.
Several bond insurers have already begun to lose AAA ratings, imperiling their business models. More worrisome, when a bond insurer is downgraded, all the securities it has guaranteed are, in theory, downgraded as well.
These companies have guaranteed more than $1 trillion of muni bonds, which could also lose AAA ratings. That worry has sparked turmoil in the muni market, potentially raising financing costs for states, cities and other government-related borrowers.
Concerns about the wider impact of trouble in the $2.4 trillion bond insurance business have encouraged regulators to step up.
Munis must take priority, Dinallo says
"While we are doing all that we can to protect all policyholders and strengthen the bond insurers, if it becomes clear that is not possible, our first priority will be to protect the municipal bondholders and issuers," Dinallo said in his prepared remarks.
"Subprime problems [should not] cause taxpayers to unnecessarily pay more to borrow for essential capital projects," he added.
The New York Insurance Department is urging big banks that are counterparties to the bond insurers to inject fresh capital into the companies and has hired boutique investment bank Perella Weinberg Partners to advise on the plans. See full story.
For his part, Dinallo said on Thursday that the problems are "extraordinarily difficult."
"Absent a government bailout, which is not planned, it is up to each of these insurers and their counterparties to come to an agreement," he explained. "They each must deal with a different set of counterparties; that is banks, broker-dealers and investment banks, each of which has a different level of exposure.
"And there are different potential outside investors with differing types of offers."
To make sure muni bonds were secured, Dinallo said he asked Warren Buffett's Berkshire Hathaway to study and value the muni portfolios of the three largest bond insurers -- Ambac, MBIA and FGIC, which is partly owned by Blackstone Group and PMI Group
In early February, Berkshire offered to reinsure $800 billion of muni bonds currently guaranteed by Ambac, MBIA and FGIC. The plan was made public on Wednesday. See full story.
Buffett's offer, however, was rejected by Ambac and possibly one other bond insurer. By the same token, the New York insurance regulator may impose a similar plan of its own if other efforts to stabilize the industry don't work. See full story.
Dinallo said on Thursday that other investors would be interested in investing in the muni-bond insurance business.
Source: MarketWatch
New York regulator suggests splitting bond insurers in two
