Bond Insurer Split: Worst Possible Outcome For Wall Street

Posted by John Carney, Feb 19, 2008, 3:05pm

When he first approached Wall Street to explore plans to rescue bond insurers, New York state’s top insurance regulator Eric Dinallo warned top bankers that they had helped create the mess and that they were facing serious losses if something weren’t done. After weeks of negotiations with an assortment of senior Wall Street bankers failed to produce a consensus on a bailout, it now seems as if Dinallo might push ahead with a plan that could trigger another round of record breaking losses for Wall Street firms.

Dinallo has proposed splitting the companies municipal insurance businesses from the businesses guaranteeing collateralized debt instruments that have suffered under the subprime meltdown. Credit ratings on more than $580 billion of asset-backed securities may be cut, according to Bloomberg. There are estimates that that could trigger write-downs of up to $35 billion. Citigroup and Merrill Lynch are often cited as having the largest exposure to the risk of an insurer downgrade.

“This is one of the worst possible outcomes for the market,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York, tells Bloomberg. And by “the market” he means Wall Street.
FGIC has already asked regulators for permission. MBIA has ousted its chief and replaced him with former chief executive Joseph Brown. He’s indicated that he will also seek to split the muni business from the CDO business.

Bond Insurer Split Threatens $580 Billion of Notes [Bloomberg]

1Recommend this! 11Comments
Posted in: Bond Insurers
Tags: Ambac, Dinallo, FGIC, MBIA

Comments

Posted by guest, Feb 19, 2008 3:35PM

Another example of a heavy-handed regulator looking out for the public by screwing the public. Dinallo's a boob and the banks are balking because if his "constructive" approach to bailing out the monolines.

Bitches.

-- Dave Chappelle

Posted by guest, Feb 19, 2008 3:46PM

Aren't you a bit ahead of yourself suggesting that the new ceo of MBIA is "indicted"? Spitzer & co usually wait until they become CEO

Posted by guest, Feb 19, 2008 3:47PM

Just what you would expect from a spitzer crony. Effing political appointments am I the only one who continues to be outraged we have a govt that lets people who have no idea about finance or economics run and regulate our economy? The fucking spoils system should not apply to financial regulation! -s75

ps please excuse the language, i have been worked up about this all day

Posted by diablo, Feb 19, 2008 3:55PM

Or Wall Street puts the money to raise the capital for the monolines, or the securities they insure become "unwrapped".

Or Wall Street asks the Arabs and Chinese and Singaporeans (?) to put the capital needed.

What it's going to be?

Of course, the whole mess in the capital markets (beyond the monolines) will provide full employment for the lawyers for many years to come.

Posted by guest, Feb 19, 2008 3:55PM

Your anger is misplaced. Maybe you should be angry at the individuals at the monolines and investment banks who thought it was a good idea to insure stuff they did not understand, instead of blaming the public servants who are trying to clean up the mess.

Posted by guest, Feb 19, 2008 3:58PM

Surely the monolines had no part in anything that will cause losses . . .

Posted by guest, Feb 19, 2008 4:00PM

They should not be trying to "clean this mess up" at all. They are only making it worse. If you split all the capital off from the unwind book then you force the losses instead of allowing the whole company to be recapitalized. That's the point. It's like calling the police because someone stole you bike, and the officer shoots you in the head because you have nothing to live for but also takes your wallet and deposits it in the bank, thus "saving" your value.

Posted by guest, Feb 19, 2008 4:01PM

where is the forehead slapper when you need him? probably still waiting for his confirm email.

Posted by guest, Feb 19, 2008 4:11PM

Not one single article about Timmay being on Happy Hour tonite. I bet Timmay's crying over the lack of exposure. Just like a pervert flasher, Timmay craves lots of expsoure!

Posted by diablo, Feb 19, 2008 4:36PM

Moody's says that a downgrade of the monolines will cost $7 to $10 billion in additional reserves that the banks and securities firms will have to find. The way this is going I'd say better have the banks find that money because a downgrade is what they are getting with or without the monoline split.

How many Northern Crocks are waiting in line?

Posted by bizness, Feb 19, 2008 6:13PM

The thing is , the losses are there. Even if they let the CDO/structured pfolios go to Baa3, it doesn't matter, because later they will have to actually pay the losses, and the monlines are not equipped for this.

The question: is it cheaper to reserve against the losses in the insurance (hold capital only) model, or just pay them upfront in the bank( MTM, fair value) model. That's the difference between recapitalizing the monolines or bailing them out.

Post Your Comment