“The company also hopes to raise $2.5 billion through a rights offering to its existing shareholders; the sale will be backed by banks.”

I’m not an investment banker, but it looks to me like the banks are trying to push the cost of solving this problem onto the shareholders. Existing shareholders will either see their current shares diluted, or will need to pay for the rights to purchase new shares to overcome the dilutive effect.

Instead of the banks throwing good money after bad, they want the shareholders to do it!

The rights will probably give the buyers the opportunity to buy shares at a discount to market price. But what does “market price” mean for a stock that has declined over 80% and often fluctuates from 5% to 20% in a single day!? It is hard to say what is a meaningful discount in that environment.

I doubt many shareholders will be jumping at the chance to buy into this deal!

I think this plan will fail unless the government steps in to provide a guarantee for the muni bonds. Otherwise the plan appears to be little more than capital raising via rights in a secondary stock offering.

That plus a little slight of hand in moving the good policies into one pocket and the bad ones into the other. The holding company and its shareholders will still be exposed to the potential losses on both of the newly split “sides”.

As for the triple A ratings, I think this plan will only kick the can down the road for about 2 to 3 months before the downgrading threat resurfaces.

Spitzer told the committee that the economy may face a “financial tsunami” as a result of potential downgrades to bond insurers and a tightening of credit markets that resulted from bad loans to homebuyers.

Federal regulators blocked earlier efforts to tighten rules, and the Office of the Comptroller of the Currency allowed “the problem to grow and the bubble to inflate,” Spitzer said.

Spitzer and Dinallo both said their focus is on the municipal market rather than banks and financial institutions that sought insurance on structured-finance securities.

“We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses,” Dinallo said. “Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.”

>> Spitzer told the committee that such a “good bank, bad bank structure,” may be necessary if other rescue plans fail. Federal regulation may also be needed, he said.

“I am not opposed to federal regulation but how and when it is done needs to be thought through,” Spitzer said in an interview with Bloomberg Television.

Insurers are supervised by states rather than the federal government, with New York often taking a lead role. New York regulates bond insurers under Article 69 of the state insurance law, Spitzer said in his testimony, calling the statute “the standard for state insurance departments around the country.”

Policy Options

U.S. lawmakers at the hearing today criticized the practices of the bond-insurance industry, saying they turned good debt bad and need to be put under the supervision of a federal regulator.

Thank God that George W. Bush is President!

— Pangloss