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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Bond Insurers
Bond Insurer Split: Worst Possible Outcome For Wall Street
By Joe WeisenthalWhen 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]
