Eric Dinallo, the former Spitzer aide who is now New York State’s insurance regulator, insists that the bond insurers are not on the verge of insolvency. But his plan to split the municipal bond business from the rest of their business only makes economic sense if it were necessary to save the companies and preserve value for the safest policy holders. So why is Dinallo so aggressively inconsistent?
What really seems to be going on is an attempt to strong-arm the banks by threatening them with the worst possible outcome of being left holding insurance that probably isn’t worth the paper its written on. If they won’t inject capital, Dinallo seems to be saying, he’ll make them pay through write-downs arising from the downgraded remnants of the broken-up insurance companies. Ugly.
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you aint got no alibi
Hey. The socialist haven’t taken over as yet (thats what the ‘Countdown’ is for remember?) The banks better take the deal because once the takeover is done, he wont even be talking about splitting the companies. He will probably just cancel all the non-muni contracts!
Say the rating agencies downgrade the monolines. Fitch did that to FGIC already. Now what happens to the banks if the monolines get downgraded even if they are not split? Their insured securities get downgraded too. No more AAA for those “insured” securities. They have to raise their capital reserves. Moody’s says that will cost the banks $7bn to $10bn just in that little item. On top of that banks are writing down their structured finance derivatives left and right. That’s a lot of bloodletting that doesn’t seem to have ended. And all the depository institutions have is the TAF. Don’t you see a bailout coming? Or what is the end-game here?
Now look at the munis. They are held hostage in this situation. The monoline downgrade prospects are hurting them too. Spitzer and other governors are sweating hard right now. Their ability to finance via bonds becomes more expensive all of the sudden. Do they want to raise taxes because the monolines are screwed? I don’t think so. The fan is pointing in their faces also. And they know what’s going to hit them. It’s more than a breeze. It’s a smelly breeze with brown disgusting stuff.
The decision to downgrade or not downgrade the monolines has no impact on the fundamentals here. They are what they are. Do you really believe that value will be created or destroyed based on a simple edict from an independent third party?
@12:00
And you my friend are not a trader (of debt at least). This has nothing to do with fundamentals, as you correctly point out, but it does make everything with insurance trade like sh*t. It also has locked the ARS markets and AR preferred b/c 2a-7 money mrkt funds cannot buy that stuff. You’re getting the pain despite the fundamentals.
Want to see the next domino? Take a look at the most recent results from Primus Guaranty. It’s a AAA CDPC (credit deriviative product company) which reported a loss of over $500mm in the last quarter (because of credit guarantees it has issued). That’s not the interesting part, though. The interesting part is that new business INCREASED dramatically. Who’s buying from this overrated shell? The dealers (think MER) who have used it to gain capital relief. Only problem is… it’s yet another shell without substance (i.e. real capital). Sigh.