Monoline Death Watch: Breaking Up is Hard to Do

Be careful what you wish for.

New York insurance superintendent Eric Dinallo seems to be getting what he wants. FGIC, the number four bond insurer, was downgraded six grades by Moody's on Thursday, from Aaa to A3, which meant it has lost its AAA rating from all agencies, and Moody's warned it could be downgraded further. The insurer followed the rather firm suggestion of Eliot Spitzer (one might more accurately call it a gun to the head) of either finding new money in five days or having the state regulators split the companies into a muni insurance business versus everything else (the everything else being largely real-estate-related structured finance).

But this may turn out to be a Phyrric victory. FGIC is a special case; it's owned by mortgage insurer PMI Group and private equity firms Blackstone, Cypress Group, and CIVC Partners. Thus, no public shareholders and thus no worries about stockholder lawsuits.

But even then, it isn't clear that this break-up is as beneficial as it is perceived to be, or whether even its mere operational objective, namely, establishing a healthy muni insurance business and leaving the rest to run off, can be realized.

First, to the assumption that the split is a good solution. As we've said before, it's based on the model used for the savings and loan workouts run by the Resolution Trust Corporation, the "good bank/bad bank" approach. That succeeded because the banks held assets that would appeal to two different investor groups, namely, banks that would buy the good bank bit, distressed investors and speculators who would buy the bad bank portfolios.

In this case, the FGIC is going to be split according to its liabilities, not its asset (its assets are investments it makes with the insurance proceeds). Superficially, this does not address the problem that the business has insufficient equity (or in insurance lingo, reserves) If the newly created muni business does not attract additional capital, all this has done is rearrange the deck chairs on the Titanic.

To be clear: Buffett's reinsurance offer did NOT involve new investment; in fact, he wanted MBIA and Ambac each to pay him $4.5 billion, which is 1.5 times the expected value of the muni insurance premiums. In other words, this would constitute a transfer to Buffett, reducing the total equity available to the good and bad businesses. Thus, saving the good business would make the bad one vastly worse off than doing nothing. And as we have said, there appears to be no legal basis for treating one group of policyholders, in this case, municipalities, more favorably than another.

And recall, while the panic in the auction rate muni market has everyone spooked (frankly, that product was trouble waiting to happen), the systemic consequences of screwing the policyholders of the bad business could be dreadful. UBS estimated the losses to the banking system resulting mainly from bond insurer downgrades could reach $203 billion. We've already had chaos, unprecedented central bank interventions, and rescues by sovereign wealth funds to get through $150 billion of losses. Even if that estimate is too high by a factor of three, it would still be a body blow to a faltering financial system.

Now if the new venture could attract enough new equity to get its own AAA or to pay the premium that Buffett wants over the expected value of the muni insurance premiums, then it is possible for the split to produce a better outcome. But worryingly, the rating agencies have either been silent or cool, which suggests they may not have been consulted as to what had to happen for this strategy to achieve sufficiently high ratings from them. If true, that's a shocking oversight. From the New York Times:

It is unclear how the ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch Ratings — would react to a split and how they would rate the two resulting companies. In a statement released Friday, S.& P. voiced concern that dividing Financial Guaranty might leave some policyholders “disadvantaged.”

And then we come to second potential stumbling block, the operational and legal issues. One widely repeated quote:

"You're trying to unscramble the egg," said William Schwitter, chairman of the leveraged-finance practice at law firm Paul Hastings. "When you take a balance sheet that is supporting a variety of obligations and try to split it in two, it's difficult."

Bizarrely, Dinallo and his investment bankers Perella Weinberg have comported themselves in a way to alienate the FGIC policyholders who were exposed enough to be considering a rescue operation. The Wall Street Journal reports:

Calyon, the investment-bank arm of Credit Argicole SA, is leading the bank group. A Calyon spokeswoman declined to comment.

The full bank group has had only tentative discussions with FGIC. One question that has dogged the group is whether the principal negotiating partner should be FGIC, its shareholders or regulators.

The banks learned of the split-up plan Friday by seeing it reported on CNBC, this person said, calling it a "bizarre situation."

All of the banks have hired legal counsel and are prepared to go to court. The person familiar with the situation said FGIC's move could result in "instant litigation." FGIC didn't respond to queries about the banks' reaction to Friday's announcement.

One plan the parties are discussing involves commuting, or effectively tearing up, the insurance contracts the banks entered into with FGIC, according to another person familiar with the matter. In exchange, FGIC would pay the banks some amount to offset the drop in value of those securities, or give them equity stakes in the new municipal-bond insurance company.

And make no mistake, it's not just the parties at the table who have reason to sue. A large group of policyholders would be damaged:

One other wild card: If FGIC splits into two, it could throw into turmoil potentially billions of dollars of bets that banks, hedge funds and other investors have made on whether FGIC would default on its own debt. If FGIC is split, it isn't clear how those "credit default swaps" would be valued, since one half of the new company would have a higher risk of default than the other.

The problem is that the "commuting" plan requires cash or some sort of deferred payment, when that will hurt the finances of the new muni entity. Similarly, selling an interest in the muni business to the disaffected bad company policyholders makes the new muni business less attractive to new investors (it would effectively dilute their investment).

And then we have the biggest bond insurer, MBIA, who has signaled that it is not on board with the Dinallo program. It has raised equity on its own, and maintained that it had sufficient reserves, although Standard & Poor's promptly disagreed. MBIA's conduct suggests that it would fight a split-up, despite the Spitzer ultimatum. The Times says that this could lead to a nasty legal row:

....on Thursday, MBIA’s chief financial officer, Charles E. Chaplin, vigorously defended his company at a hearing in Congress and said it did not need any help.

If MBIA and Mr. Dinallo remain at odds over whether the company needs to do anything, the dispute could end in court, legal experts say. Mr. Dinallo has significant power as superintendent to take control of insurers if he believes there are not enough assets to pay claims by policyholders, but the company and its policyholders can fend him off if they can prove his decisions are “arbitrary and capricious,” said Francine L. Semaya, an insurance lawyer at the law firm of Cozen O’Connor.

jck at Alea, who has a fiendishly good understanding of complicated financial instruments, has argued that in fact MBIA is right and the nay-sayers have the economics of its contracts wrong (ie, the use of mark to market proxies vastly overstates the losses likely to be incurred over the lives of the policies). While he may narrowly be correct, what makes me dubious is if matters were this straightforward (ie, Bill Ackman did the math wrong and the monolines are fine), the inability of the insurers to persuade the rating agencies and most important, the regulators who ought to understand this business intimately, says there is something rotten in Denmark.

Ackman has been very transparent in how he has done his computations for MBIA and Ambac, breaking down his assumptions by financial product. If either company wanted to dispute his analysis in private, which is where it counts, they simply could have gone through any one of the products in detail to show the magnitude to which Ackman was wrong. That would have driven a stake in the heart of his campaign. The fact that no one has been persuaded, and that Dinallo (and presumably his Wisconsin peer, since discussions with Wisconsin-domiciled Ambac are also moving forward) says the bond insurers were unconvincing. They have concluded that they are inadequately reserved, even if Ackman is wrong in the particulars of his analysis.

If MBIA tries to block a break-up, it will have to prove the validity of its assertion that it is adequately capitalized and has reasonably good odds of keeping its AAA. That means it will have its accounting and loss assumptions, versus those of the regulators, discussed in court in some detail.

If nothing else, expect to have an entertaining next couple of weeks.

Private Sector Cooling on the Dollar

Brad Setser, in one of his thorough and informative posts, parses the December Treasury International Capital report and finds strengthening of a trend he noted in the August TIC report: that the dollar purchases that fund our current account deficit come almost entirely from central banks and other government purses, and not private sector buyers:

A not-particularly-good TIC data release hardly even registered. But make no mistake – December capital inflows into the US were on the weak side. Net flows were only $60b, a bit under what the US needs to cover its current account deficit. Net long-term flows were only $45b.

The TIC data (found here) though did at least make one thing clear – in December, there really can be no argument about who financed the US deficit.

Central banks and sovereign funds supplied the US with $52.1b of financing, $35.8b in long-term financing and $16.3b in short-term financing.

Private investors supplied $8.4b (net).

And we already know central banks and sovereign funds supplied the US with even more financing in January than in December....

As I constantly note, the pattern of past data revisions suggests that the TIC tends to understate official inflows and overstate private inflows.

There is considerably more detail in the post.

Setser in an earlier post argued that concerns about a small decline in dollars as a percentage of total official reserves was misplaced. He believes that the dollar is in no imminent danger of losing its reserve currency status. But he is nevertheless acutely aware of the dangers of the US losing its privileged status:

The big issue facing the world isn’t the end of the dollar as a reserve currency so much as the overuse of the dollar as a reserve currency – the resulting accumulation of dollar reserves by countries that really have no need for reserves of any kind...

There also is -- perhaps -- a growing sense the enormous increase in central bank dollar holdings may reflect political decisions that make little economic or financial sense... The dollar hasn’t held its value.... And it isn’t likely to hold its value v. most emerging market currencies....

The US now relies on exorbitant privilege not so much to live well as to sustain the otherwise unsustainable – notably large private capital outflows from a country with a large current account deficit that isn't attracting large private inflows. Without a lifeline from the world's central banks, the US wouldn’t be able to finance its external deficit by selling under-performing financial assets. And if the US ever had to finance its deficit by selling financial assets that outperformed comparable assets, watch out. The US external position would deteriorate rapidly.

That leaves the United States in a position of intrinsic vulnerability.

The real risk though isn’t that the dollar will suddenly lose out to the euro. The real risk is that a bunch of already over-reserved emerging economies will conclude that it isn’t in their interest to hold even more dollars and euros – dollars and euros that they no longer really need – in their portfolio, and that this change will come before the US has weaned itself off its need for subsidized central bank financing....

There is, though, another risk – namely that China and a host of others won’t change, the continued availability of such financing will allow the US to sustain large deficits without producing assets that private investors want to hold, and the overhang of unneeded and in some sense unwanted dollar reserves will grow. The result: the United States’ dependence on the political good will of its creditors will only deepen.

Setser focuses keenly on the official data, which says our suppliers are still willing to fund our overconsumption habit, but the signs from the private sector are far less encouraging. This article from the Globe and Mail, "Is the greenback's grip slipping?" cites a UBS study that found that companies that trade internationally are moving away from dollar-based invoicing and argues that private sector use of reserves greatly exceeds, and is therefore more significant than central bank reserves. However, the piece also says that the decline of the dollar is gradual:

The chief executive of jewellery giant De Beers SA made waves this week when he suggested the global diamond industry consider pricing the shiny gems in a currency other than the U.S. dollar.

That comment, from the head of the world's largest diamond company, is the latest in a string of signs that the greenback's glory days could be fading.

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error - or considerable fiscal strain - is likely to cause the dollar to lose reserve currency status entirely.”

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world's central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

“The private sector's use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”...

“We as the diamond industry should maybe think about a different currency than the dollar,” Gareth Penny, the head of De Beers, said at a diamond conference in Tel Aviv on Monday, according to a Bloomberg report. “Maybe it's time to recognize the need for a different paradigm.”

Don Lindsay, the head of Canadian miner Teck Cominco Ltd., said Tuesday that given the soaring loonie, his company is no longer interested in investing in the diamond sector.

The U.S. dollar's position as the global reserve currency means that it is held by central banks and other major financial institutions as part of their foreign exchange reserves, a situation which tends to draw the most attention.

In addition, the UBS report said that companies often use the U.S. dollar for international corporate transactions, which has created a private-sector greenback reserve.

Japanese companies have shifted to invoicing the sale of goods or services in the yen, particularly with deals done in Asia, UBS said. “This means, of course, that Japanese exporters have less need to hedge currency exposure today than they did in the past.” Aside from raw materials, the Australian economy is also relatively unlikely to pay for its imports in U.S. dollars.

Global trade data suggest the greenback appears to be declining as an international medium of exchange. “International trade growth has outstripped the amount of dollars in international circulation by some margin,” Mr. Donovan said.

A UBS “survey of our global equity analysts indicates that the dollar is not universally accepted as an international invoice currency.” The report listed global lodging and leisure as one sector where the dollar will play a declining role.

While most central banks have maintained their U.S. dollar holdings, the rise of sovereign wealth funds also points to a rising interest in portfolio diversification. “This diversification will place less emphasis on liquidity and more emphasis on returns, and thus could lead to a permanent reallocation away from the dollar,” the UBS report said.

The weakening of the U.S. dollar is comparable to the decline of sterling in the 1920s and 1930s. “Like sterling 90 years ago, the dollar is the most important reserve currency in the world, but it is no longer the only reserve currency - nor even the overwhelmingly dominant choice as a reserve currency,” Mr. Donovan said

Although the euro has generally been touted as the greenback's replacement, the benefits “of reserve status are likely to be shared with a wider range of alternative currencies,” he said.

"Bangladesh bank offers loans to US poor"

If this microfinance venture by Grameen Bank is as successful as I hope it will be, it will be an indictment of US banks who provide only very high priced products to the lower income and poor, and then justify it by claiming that they offer a useful service. They of course prey on the prejudice that the poor by definition are bad risks, and compensate by putting high credit spreads into their products.

Another approach would be to screen potential clients much more thoroughly, and find borrowers who looked capable of meeting their obligations. Doug Smith in Slate informed us that not-for-profit mortgage lenders had defaults comparable to prime borrowers in their subprime portfolios due to careful screening and borrower education. But that takes more work and is less lucrative. Competition will show whether the conventional view is correct or merely self-serving.

From the Financial Times:

Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.

The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.

“Now is a good time because of . . . the subprime crisis and that highlights the issue that the financial system is not perfect,” Muhammad Yunus, the bank’s Nobel Prize-winning founder, told the Financial Times.

Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.

In Bangladesh, Grameen lends to poor women seeking to start small enterprises who cannot borrow from banks because they do not have accounts or a high enough credit rating. The bank, which started with $27 in loans Mr Yunus made to 42 women in Bangladesh in 1976, has now made more than $6.5bn in loans to 7m people in the country.

In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.

Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.

After beginning with small loans to micro-entrepreneurs, Grameen plans to expand into other businesses such as remittances and mortgages.

Bush Administration Hides Economic Data

We've long complained that you have to take a lot of the statistics put out by our government with a handful of salt, but even worse is simply deep-sixing information that makes it look bad.

Outsourced to Think Progress:

The U.S. economy is faltering. Family debt is on the rise, benefits are disappearing, the deficit is skyrocketing, and the mortgage crisis has worsened. Conservatives have attempted to deflect attention from the crisis, by blaming the media’s negative coverage and insisting the United States is not headed toward a recession, despite what economists are predicting.

The Bush administration’s latest move is to simply hide the data. Forbes has awarded EconomicIndicators.gov one of its “Best of the Web” awards. As Forbes explains, the government site provides an invaluable service to the public for accessing U.S. economic data:

This site is maintained by the Economics and Statistics Administration and combines data collected by the Bureau of Economic Analysis, like GDP and net imports and exports, and the Census Bureau, like retail sales and durable goods shipments. The site simply links to the relevant department’s Web site. This might not seem like a big deal, but doing it yourself–say, trying to find retail sales data on the Census Bureau’s site–is such an exercise in futility that it will convince you why this portal is necessary.

Yet the Bush administration has decided to shut down this site because of “budgetary constraints,” effective March 1:



Economic Indicators is particularly useful because people can sign up to receive e-mails as soon as new economic data across government agencies becomes available. While the data will still be available online at various federal websites, it will be less readily accessible to members of the public.

In its e-mail announcement on the closing of Economic Indicators, the Department of Commerce acknowledged the “inconvenience” and offered “a free quarterly subscription to STAT-USA®/Internet™” instead. Once this temporary subscription runs out, however, the public will be forced to pay a fee. So not only will economic data be more hidden, it will also cost money.

It’s ironic that the Economic and Statistics Administration is facing “budgetary contraints,” considering Bush recently submitted a record $3.1 trillion budget to Congress for FY ‘09.

Steve Bennen at the Carpetbagger Report provides more exampless of the Bush Administration hiding information it doesn't like:

As long-time readers may recall, I started keeping track of instances in which the Bush administration would hide inconvenient data quite a while ago. Some of my favorite examples include:

* In March, the administration announced it would no longer produce the Census Bureau’s Survey of Income and Program Participation, which identifies which programs best assist low-income families, while also tracking health insurance coverage and child support.

* In 2005, after a government report showed an increase in terrorism around the world, the administration announced it would stop publishing its annual report on international terrorism.

* After the Bureau of Labor Statistics uncovered discouraging data about factory closings in the U.S., the administration announced it would stop publishing information about factory closings.

* When an annual report called “Budget Information for States” showed the federal government shortchanging states in the midst of fiscal crises, Bush’s Office of Management and Budget announced it was discontinuing the report, which some said was the only source for comprehensive data on state funding from the federal government.

* When Bush’s Department of Education found that charter schools were underperforming, the administration said it would sharply cut back on the information it collects about charter schools.

My friends at TPM took this even further, and compiled a comprehensive list, through a project they called, “What You Don’t Know Can’t Hurt Us.” Paul Kiel published the latest version a couple of months ago, and it’s chuck full of mind-numbing examples like these.

When public information conflict with the White House’s agenda, the Bush gang has a choice — deal with the problem or hide the information. Guess which course they prefer?

Links 2/16/08

Cell Phone Use Linked To Increased Cancer Risk Information Week. But the absolute risk is not very high.

"Like giving a drink to an alcoholic" New York Times. Bloomberg on the stimulus plan.

Idle parenting means happy children Telegraph

Goldman Sachs’ Friedman: 80 Cents is ‘The New Par’ Peter Lattman, Deal Journal, Wall Street Journal

American pays $50,000 to clone dead dog Financial Times. And a pit bull at that.

UK Chancellor Attacks City Bonuses

Alistair Darling, the UK's Chancellor, criticized bonus payouts as too often not warranted by performance and called on boards to exercise more restraint. The attack came as a surprise, but the proximate cause seems to lavish pay for those in the City while their companies and the country as a whole is not doing all that well.

From the Telegraph:

The Chancellor today criticises the culture of rewarding failure in the City by giving bonuses to executives who appear to have done little to deserve them.

In an interview with The Daily Telegraph, Alistair Darling says that as the country heads into an economic downturn, company boards must be able to justify large bonuses. They should apply the "next-door neighbour test" of whether the payouts would be regarded as reasonable and responsible in a climate when millions of households are struggling with rising living costs, he says...

City bankers made an estimated £7 billion in bonuses last year. The bumper bonus round was one of the largest ever for investment bankers, despite the global economic turmoil and significant falls in the value of shares on stock markets around the world....

Mr Darling says: "There's absolutely nothing wrong with giving somebody a reward but at the present time when people are going through these difficulties that's something the boards have got to look at.

"They should behave responsibly. You have to ask - can you justify this? Can you say hand on heart this is the right thing to do? If you can't justify it to your next-door neighbour you should think again."

In the next few weeks, the major high street banks are expected to disclose details of multi-billion-pound profits for the past financial year and disclose details of the bonuses paid to their executives. Bob Diamond, the president of Barclays and head of its investment bank, is likely to top the pay table.

He is set to collect a bonus of at least £14.8 million this year despite the bank becoming one of the biggest British casualties of the credit crunch.

Mr Darling says: "I don't have any problem with the chief executive of a bank or an oil company getting a reward for doing the right thing by the company, but you've got to be able to say to people, 'Here's someone who made a difference, the reward may be a lot but he's justified it.'?"

Bankers insist that bonuses were more targeted this year, with the most successful receiving exceptional awards and under-performers getting "a clear message" that they are on borrowed time.

UBS: Banks at Risk for $203 Billion in Writedowns

Credit market troubles have the potential to cause considerably more damage to bank balance sheets. A UBS analyst tallies the possible hits as $203 billion, with fallout from the deterioration of bond insurer guarantees as the biggest source of risk.

From Bloomberg:

The world's banks ``remain at risk'' of up to $203 billion in additional writedowns, largely because the bond insurance crisis could worsen, UBS AG said.

``Banks have made progress in credit-market related writedowns,'' London-based UBS analyst Philip Finch said in a note to investors today. ``But more are expected,'' he added.

Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That could rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. ``Risks are rising and spreading and liquidity conditions are still far from normal,'' the note said.....

Increased credit costs of 10 basis points would lower 2008 sector earnings to 5.9 percent from 10 percent, the report said. A basis point is 0.01 percentage point.

Securitization Reform: Don't Hold Your Breath

One of the not-sufficiently-acknowledged-in-the-MSM reasons for the current credit crisis is the sharp contraction of securitization, particularly of mortgages. Banks are balking at honoring LBO commitments because they can't on-sell them as collateralized loan obligations, at least in the current environment. CDO new issues have pretty much halted, with only three deals this year (some might say that is a good thing). The would-be saviors of the housing market are all over Freddie, Fannie, and the FHA to guarantee more mortgages because the private paper pipeline isn't moving enough product.

Some of these problems are more fundamental than others. The CLO market is likely to recover once Wall Street works off its very large inventory. CDO has become a very bad word and the product is unlikely to return except in a very modest way.

But the US has become dependent on a functioning securitization market; the alternative, of having banks hold the loans they originate, is straightforward but more costly (capital-related costs, not operating expenses, are the big reason). But if securitization does not recover, banks will have to devote more equity to good old fashioned lending at precisely the time when it is scarce. Not a pretty picture.

But Hank Paulson is a man with a plan, or more accurately, a plan to develop a plan. In a Bloomberg interview, he said that the Presidential Working Group on Financial Markets, is looking at how to remedy the securitization process — including Fed chief Ben Bernanke, SEC chairman Christopher Cox, and the head of the CFTC. Note that securitization is one issue in a list that includes the role of rating agencies, off balance sheet vehicles, and valuation. And Paulson also made clear that any proposal is "a number of months away" and that the markets needed to get through this period of turmoil first.

Um, what if Paulson has his priorities backwards? It may take intervention on the regulatory front, not the mere provision of ever-lower interest rates, to entice various players back into the water.

Let's consider: Paulson and Cox are ideologically opposed to much in the way of intervention. Bernanke really is out of his depth in this area and will defer to the others. So this is a group predisposed to tinker, which is consistent with the minimal, more-symbolic-than-substantive moves that Paulson has launched to address the problem of large-scale mortgage borrower defaults and the near absence of traditional workouts.

Today's Wall Street Journal MarketBeat had some worrisome commentary from Cox:

The SEC staff has been looking into possible ways to adjust U.S. regulations so there is less reliance on credit ratings, SEC Chairman Christopher Cox said....“If one were to seek to change the rules and laws concerning the special status of credit ratings for regulatory purposes you would first have to have a thorough appreciation of all of the consequence....

So how would the SEC substitute — and diminish — the regulatory reliance on ratings?

Mr. Cox said “one means of substituting … would be to substitute the current definition of the rating currently provided by the rating itself.”

What that means is that the SEC is considering ways of setting criteria that gets away from the ratings but focuses instead on the underlying concept. For example, for some rules the SEC could require bonds to be liquid and then develop some measure by which to sort them other than a credit rating, says one person familiar with the matter.

Mr. Cox last week said the SEC may consider proposing rules that would require rating firms to show the accuracy of past ratings and distinguish ratings of corporate and municipal debt with that of structured investments, such as securitized mortgages. Today, he said a rule proposal is not yet floating around and “we’re at least a couple months away.”

Require bonds to be liquid?. That is the most deranged thing I have heard in a very long time, and this presumably coms from someone within the US's top securities regulator. It confirms what I have long suspected: that the SEC is preoccupied with the equity market and knows perilous little about debt.

A simple illustration: just about all corporate bonds are illiquid. That's one reason credit default swaps are popular. Investors can use CDS to create synthetic corporate bond exposures, which unlike the underlying bonds, can be readily traded. But Cox would have us write off the corporate bond market.

And (in oversimplified terms), bonds are priced in spreads over Treasuries based on their ratings and maturity (or duration). Yes, if a bond is suspected as being worse than it really is, it will often trade as if it were rated lower. But the point is that ratings have been a key element in pricing precisely because they are a convenient shorthand for credit quality. Having non-rating ratings doesn't appear a good direction of thinking; perhaps instead dethroning the role of ratings of individual securities among investors (for instance, pension funds face limits on the amount of non-investment-grade bonds they can hold) and instead replacing it with portfolio-wide notions of risk that are not ratings based might be a better avenue (what you want to avoid is what you have now with the monolines: large-scale sales forced by downgrades). But that would have to be accomplished by modifying the regulations of the various investors, many of which are beyond the SEC's reach (and some rules are also codified in laws).

Similarly, Cos fails to mention of the most obvious problem, that of the conflict of interest post by having rating agencies paid by issuers, when their rating are allegedly for the benefit of investors.

Since this is a lame duck Administration, there is neither the time nor the will to come up with root and branch reform and knock heads to get it implemented. Instead, the aim, as with the Hope Now Alliance, is to have Potemkin reform, something that can be implemented with relative ease, so that the Republican presidential candidate has a soundbite come Septermber-early October.

Paul Jackson at Housing Wire observes that finding a way to bring back credit enhancement, which does not appear to get consideration by anyone in the officialdom, may be the most important element in the securitization equation:

While the monoline business may or may not be less important in the municipal bond markets due to the unbelievably low incidence of defaults, the guaranty business is actually far more important to the MBS business than most have given attention to thus far — precisely because defaults can and do happen.

For secondary mortgage market participants, resolving this crisis isn’t just a piece of the puzzle; it might be the puzzle. At the American Securitization Conference in Las Vegas last week, many investment bankers suggested on panels and in hallways that the bond insurer mess is the single largest issue keeping the private-party market from having a chance at establishing any modicum of recovery going forward.

Well, the bond insurers are on death watch, which does not bode well for the securitization market.

Hedge Funds Questioning the Soundness of Investment Banks

In a sign of how dramatic the reversals of fortune have been on Wall Street, hedge funds, until recently considered the riskiest players in the financial services industry, are now questioning how safe it is to leave cash and securities with their prime brokers, the securities firms that provide credit, brokerage, clearing, and sometimes fund administration. The issue arises because some prime brokerage agreements provide that assets in the hands of the prime brokers are ceded to them.

From the Financial Times:

Call it the final indignity for banks: their hedge fund customers, generally regarded as the most hazardous financial operators, are questioning the creditworthiness of their prime brokers.

Some of the world’s biggest hedge funds have reviewed agreements with their bankers, assessing whether assets and cash left with the prime brokers are safe.

Hedge funds, bankers and advisers say this has seen a shift in assets away from those banks regarded as riskiest following multi-billion dollar write-offs – bad news for the banks given the high profitability of prime broking.

“It is quite paradoxical,” said Angelos Metaxa, a director of CM Advisors, a $3bn [€2.05bn] Geneva-based fund of hedge funds. “In August, everyone was worried about a hedge fund blowing up, but now they are worried about a bank blowing up and taking a few hedge funds with it.”

Hedge funds rely on prime brokers to provide financing and to act as custodian for their investments. But their exposure if there was a collapse depends on how their agreements are structured. So-called “rehypothecation” – when legal ownership of the assets rests with the bank, rather than the hedge fund – is now being re-examined by the funds.

The move is being accelerated by pressure from investors, many of whom have begun to question the managers of the funds they invest in about the risks they may be running.

One of London’s largest managers said it had been grilled at length by the directors of its hedge funds about bank risk, and had moved some assets between prime brokers as a result.

Robert Sloan, a managing partner of S3 Partners, a New York financing specialist, said: “I don’t think the hedge funds are the ones taking the risk [of a bank failure] seriously – but their investors are making them take it seriously.”

Some prime brokers, including Barclays Capital and Credit Suisse, are using their position as part of big commercial banks as a marketing tool, while other brokers that were not hit by the subprime crisis say they have been beneficiaries of the worries.

However, some prime brokers have fought back with detailed explanations for funds of their financial strength and guarantees which protect their money in the event of failure.

In many cases, hedge funds are being given clear choices: keep their assets segregated, so they are completely safe, or switch them to the prime broker’s name and get a discount.

Spitzer to Monolines: Drop Dead

The endgame for the monolines is upon us.

As reported in the Wall Street Journal and the Financial Times, New York governor Eliot Spitzer, in testimony before the House Financial Services committee, said that bond insurers needed to conclude deals to raise capital in five business days. Otherwise, they would be split into a municipal bond business, which would be controlled by regulators and presumably sold, and the problematic structured finance remainder would suffer downgrades and go into runoff mode.

The downgrade today of number three bond insurer FGIC by Moody's from Aaa to A3, a full six notches was another reminder that time is running out (although the rating agency mentioned that MBIA and Ambac were in better, if still doubtful. shape).

It's generally a mistake to tangle with a regulator, particularly when he is acting to address a genuine problem (in this case, the costly seize up of the auction rate securities market, which is subjecting municipalities to nasty unexpected costs). However, Spitzer and his deputy Eric Dinallo have no authority over Wisconsin domiciled and regulated Ambac. The biggest target for his message is MBIA, and that company has shown it is up for a fight (one illustration: it attempted to refute Pershing Square Bill Ackman's latest missive to the regulators). If they have any legal means of blocking a breakup, expect them to try. After all, management has nothing to lose at this juncture, so even a low-odds gamble or delaying tactic would look attractive to them.

Wonder what those poor saps that bought MBIA stock in its recent offering are thinking now.

Entertainingly, Spitzer was abrasive in his Congressional testimony, getting feisty with ranking Republican, Alabama's Spencer Bachus and bluntly telling Congress that they were too late to be helpful. Weirdly, after being rude, the New York contingent said a $10 billion line of credit from the Feds would be helpful. Go figure.

From the Wall Street Journal:

The clock is running out for bond insurers to save their triple-A credit ratings.

In congressional testimony yesterday, New York Gov. Eliot Spitzer gave a three-to-five-day time frame for the bond insurers to raise much-needed capital or find other ways to resolve their problems....

Speaking before a House Financial Services subcommittee, Mr. Spitzer effectively threatened that state regulators -- namely, Eric Dinallo, the superintendent of the New York State Insurance Department -- would "have to act" and potentially "strip the municipal businesses" from the bond insurers if they didn't find a solution soon....

Most analysts agree that bond insurers will fail over the long term if they don't carry triple-A ratings...

Mr. Spitzer, who took on Wall Street as attorney general, jostled with Republicans at the hearing and slammed the Bush administration for its oversight of the banking industry....

The brunt of Mr. Spitzer's attack was aimed at the panel's ranking Republican, Rep. Spencer Bachus, after the Alabaman raised questions about state regulation of banking and insurance.

"Mr. Bachus, you are involved in a fingerpointing exercise," Mr. Spitzer said, speaking over the lawmaker. Later, Mr. Spitzer did something that almost never happens at hearings: He started aggressively asking Mr. Bachus questions. Typically, only legislators are permitted to ask questions.

During a recess, Mr. Spitzer told reporters that splitting the bond insurers' businesses was a last resort. "The clear preference is a recapitalization of the companies," he said. "Even if the deals don't close, the sort of market comfort that would be needed to stabilize the marketplace could get there pretty quickly. We just have to wait and see what happens."....

Turning up the heat yesterday on the banks' discussions, he said in an interview that there are "some mechanisms" in the law that allow regulators to "force [the bond insurers] into what's called 'rehabilitation.'" During his testimony before the panel, he asked Congress for a $10 billion line of credit for the bond insurers, which he said could encourage banks to contribute capital.

Note: in case you infer that the $10 billion request came from Dinallo (the Journal's drafting is rather artless), I checked the transcript of Dinallo's remarks, and their is no mention of rehabilitation or a credit line, although it is possible they were mentioned in response to questions.

Citi Freezes Hedge Fund After Losses

January was a bad month for hedge funds. Depending what average you looked at (different services define strategies somewhat differently and have distinct comparison groups), a loss of 2% was a pretty typical figure, and I have heard rumors of quite a few funds, particularly quants, taking double-digit hits.

The wounded are coming to light. Citi has halted redemptions on a medium-sized fund, $500 million CSO Partners, a corporate bond player. The fund's manager, John Pickett, made the mistake of placing a big order from a single leveraged loan deal right before the market turned sour. Worse, Pickett tried to back out of the buy, claiming the terms were changed on him, but was unsuccessful, leading to the fund's losses. But either way, it was a breach of basic investment protocol to place such a big wager on one transaction.

As the front page Wall Street Journal article recounts, Citigroup's hedge funds on the whole have not done all that well:

Citigroup Inc. has barred investors in one of its hedge funds from withdrawing their money, another black eye for the financial behemoth's troubled foray into new types of investments.

Citigroup suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to yank more than 30% of the fund's roughly $500 million in assets. To stabilize the fund, which had an 11% loss last year, Citigroup last month injected $100 million. The fund's longtime manager, John Pickett, has left, following a bitter dispute with Citigroup executives and complaints from investors that he put too much money into a single investment that went bad.

Alternative-investment products such as hedge funds are a relatively small business for Citigroup, which has about $2.4 trillion in assets. Citigroup's more than 80 alternative products held $61.9 billion in assets as of Sept. 30, of which about $11.5 billion represented Citigroup's own capital...

A large Citigroup hedge fund called Falcon Strategies suffered a 30% decline last year as its bets on the credit markets backfired. Old Lane Partners, a hedge fund now run by Citigroup that was founded by Mr. Pandit and other former Morgan Stanley executives, has shown lackluster performance, posting a 1.8% loss in January....

Even Goldman Sachs Group Inc., which has thrived amid the volatile market, has had trouble with its hedge funds. Its Global Alpha fund, which bets on macroeconomic trends, was down 39% last year, though it's up a bit this year. Another $6 billion Goldman fund that started this year has stumbled out of the gate, according to investors, losing more than 5% in January.

The weak performance by CSO Partners and other Citigroup hedge funds contributed to an 89% decline in fourth-quarter net income by the bank's alternative-investment unit. Its profit fell to $61 million from $549 million a year earlier....

The CSO Partners fund ran into trouble last June when Mr. Pickett, the fund manager, placed an order for hundreds of millions of dollars in loans. The size of the order exceeded internal trading limits at Citigroup, according to people familiar with the situation. A lawyer for Mr. Pickett declined to comment.

CSO, which stands for Corporate Special Opportunities, was started in 1999 with Citigroup's own capital. In 2004, it began accepting money from outside investors such as pension funds and wealthy individuals. Those investors now account for most of the fund's assets.

Since its start, the hedge fund has been run by Mr. Pickett, who in the late 1980s joined Salomon Brothers, now part of Citigroup, as a bond analyst in New York. Mr. Pickett was well-regarded on Wall Street. Some colleagues say he was one of the most talented credit traders they've known. CSO, based in London, compiled a solid track record investing in European and U.S. corporate debt, gaining about 27% since opening to outsiders.

Mr. Pickett's big order last June was for several hundred million dollars of leveraged loans that a group of banks was selling in a private auction on behalf of a German media company, according to people involved in the transaction. At the time, CSO had roughly $700 million in assets, meaning that Mr. Pickett wanted to commit more than half of the hedge fund's assets.

Some investors in the fund contend that executives at Citigroup didn't supervise Mr. Pickett closely enough. "I don't understand...how it would have been possible for him to take on a position that was disproportionately large," says one investor in CSO.

Citigroup defends its handling of the situation. Spokesman Jon Diat said CSO and similar funds "are subject to comprehensive internal fiduciary risk oversight, risk management practices and senior-level management supervision."

The seven banks running the June auction allocated CSO a bundle of loans with a price tag of more than €500 million ($730 million), say the people involved in the transaction. Mr. Pickett tried to back out, saying the banks in the deal changed the loan terms after he submitted his bid.

There was a lot riding on whether Mr. Pickett could cancel his order. The credit crisis roiling financial markets last summer was eroding the value of the loans. If they wound up on the CSO's books, the hedge fund's performance would suffer.

Mr. Pickett argued that it was his fiduciary duty to investors to cancel the order. He proposed to Citigroup executives that the fund sue the banks arranging the transaction.

Executives at Morgan Stanley, a lead bank on the loan deal, cried foul. They called Mr. Havens, who was Mr. Pickett's superior and former head of global sales and distribution at Morgan Stanley.

Mr. Havens essentially sided with Morgan Stanley. He and James O'Brien, another Morgan Stanley fixed-income veteran who joined Citigroup in October, instructed Mr. Pickett to not initiate any legal action. They also began trying to negotiate a settlement with Morgan Stanley over the deal.

Mr. Pickett responded by accusing Messrs. Havens and O'Brien of ignoring the fund's fiduciary duty and having a potential conflict of interest given their ties to Morgan Stanley, say people familiar with the events. Mr. Diat, the Citigroup spokesman, declined to comment on behalf of Messrs. Havens and O'Brien. Morgan Stanley spokesman Mark Lake declined to comment.

Negotiations between the banks and Mr. Pickett dragged on for months. "There was an army of lawyers on both sides," says a person familiar with the matter.

In early December, Citigroup executives agreed to a settlement proposed by Morgan Stanley. Under the deal, CSO would purchase €512 million (about $746 million) of the loans at face value, even though they were trading for 86% to 93% of their face value, according to a letter that CSO sent to investors. The agreement also required CSO to pay the banks' legal expenses.

Had it not purchased the loans and paid the legal costs, CSO would have reported a modest positive return for 2007 -- not a 10.9% loss.

On Dec. 12, the week after the settlement, Mr. Pickett handed in his resignation.

Within weeks, anxious investors were trying to pull their money out of CSO. Mr. Pickett's successor, Michael Micko, said in a Jan. 25 letter to investors that the fund had received requests to withdraw more than 30% of the fund's capital. Explaining why CSO was halting redemptions, Mr. Micko said that if the fund granted all of those requests, it would have to sell valuable assets at deep discounts.

"This would be to the detriment of all investors," the letter said.

Links 2/15/08

A Crisis of Faith Paul Krugman, New York Times. On the loss of confidence in fancy finance.

Stuck with a bad loan, a Staten Island family fights back Staten Island Advance. A judge deems a lender in violation of New York laws against predatory lenging, voids a mortgage, and orders damages paid. Expect an appeal.

No Pristine Oceans Left, New Map Shows National Geographic News

China's CITIC, Bear Stearns plan to increase stake in each other Xinhua

Banks Advised to Renege on LBO Commitments

Ohh, the plot thickens. Investment banks are choking on unsold inventory of LBO loans that appears destined to continue to fall in value. These deals are already underwater and expected to hear further south. The interest payments float off short-term interest rates. so the widely anticipated Fed rate cuts will make them even less attractive.

Part of why the firms are now in this mess is that they had entered into funding commitments prior to the acute phase of the credit crunch in August. Their obligations were clear, so it was well-nigh impossible to weasel out of them, and investment banks were also concerned about their reputations.

Image is a luxury of the wealthy, and crass commercial considerations have now taken precedence. Attorneys are now advising the big securities firms to abandon these deals, since any fees they would pay would be less than the losses they would sustain by moving ahead. And if all firms take this posture, there won't be any stigma attached.

The Financial Times article on this development quotes a lawyer who says this move would mean 500 to 1000 points off the Dow. He has clearly drunk a bit too much of his clients' Kool-Aid. While this is a negative for stocks, there has already been a big slowdown in buyout activity since the summer and some experts forecast a prolonged period of adjustment. An incremental change won't have that big an impact.

From the Financial Times:

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments... legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans...

However, the chances of banks abandoning buy-out deals – such as those for Clear Channel Communications, the radio station owner and outdoor advertising company, and BCE, the Canada-based telecoms group – are growing as the market prices for the leveraged loans used in such transactions continue to fall....

Already, it is understood that one bank has marked down its share of the loan used in the Clear Channel buy-out to 85 cents on the dollar.

By contrast, lawyers are telling the banks that if they walk away from deals, their biggest liability would be equivalent to the so-called reverse break-up fee that private equity firms pay target companies when deals fail to close. These fees usually amount to about 2 per cent of the total value of a deal, or about $500m in a large buy-out.

Lawyers say there could be other costs for the banks, such as covering the expenses buy-out firms incur while doing their homework on bids.

Further, they do not rule out the possibility that banks could have to pay greater damages in litigation.

What is sure is that banks are giving greater thought to dropping out of deals. “We are already there in terms of the economic pain,” said the head of debt capital markets at one major Wall Street firm. “Banks sitting on $30bn of debt for one deal are looking at $4.5bn of losses. That is enough to play hardball.”

Spitzer: Bush Administration Blocked Curbs on Predatory Lenders

Eliot Spitzer, former New York State attorney general, now governor, savages the Bush Administration in a Washington Post op-ed today (hat tip Mark Thoma). He discusses the measures taken by Federal banking regulators, namely the Office of the Comptroller of the Currency, to stymie state efforts to curb predatory lending.

While the article is largely accurate and highlights a largely unknown chapter in our credit mess, it is a tad misleading on a couple of points. Spitzer presents the OCC as an unimportant regulator, when starting with the Clinton Adminsitration, under Comptroller of the Currency Eugene Ludwig, the OCC has been playing a more active and influential role than in the past. Similarly, states have been in a long-running turf war with the federal government over banking regulation, and the states have lost most battles, as this case attests.

From the Washington Post:

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

Dinallo Considers Breaking Up Bond Insurers; MBIA Doth Protest

Bloomberg gives some updates du jour on the bond insurer front. As rumored, New York insurance superintendent Eric Dinallo is considering breaking up the monolines into the muni operations versus everything else:

Bond insurers may be split into two pieces to bolster credit ratings and protect municipalities and bondholders, New York's top insurance regulator plans to tell Congress.

One part would operate the profitable municipal bond insurance business, while the other would handle so-called structured finance products, according to testimony prepared for Eric Dinallo, the New York State insurance superintendent. Dinallo is scheduled to address a U.S. congressional committee today.

``Our first priority will be to protect the municipal bondholders and issuers,'' according to Dinallo's testimony. ``We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.''

As we noted in an earlier post today, the priorities have been turned on their head. Before, the reason for a rescue was to prevent carnage on Wall Street. That objective has now been shunted aside as municipalities are hit by the seize-up in the auction rate securities market.

And we've pointed out that this is not as good a solution as it appears to be:

This seems to be a misguided application of the "good bank-bad bank" approach used in the saving & loan workouts.

But consider the differences: the dead S&L's landed in the FDIC's lap. They had to figure out what to do with them, and they wanted to make a recovery on the payments they made in deposit insurance. So the Resolution Trust Corporation was set up. Note that a big issue was that the Federal government had to continue to fund the S&L's working capital and also pay to keep some staffing going. That cost was considerable and controversial, and led the RTC to sell assets faster than it would have if it had wanted to maximize value.

The reason for segregating assets was simple: there were two different types of investors who might want to acquire them: banks that hadn't been too badly damaged were interested in the "good bank" assets; distressed players and wealthy individuals went after the "bad bank" assets. The bad bank assets were going sufficiently on the cheap that even parties that had never dabbled in that sort of deal like Ron Perlman made acquisitions and did very well.

But what does a segregation achieve here? No one but an AAA rated party would make sense as a buyer/reinsurer of the muni portfolio. Buffett already having decided to enter the business on a de novo basis means the only interest another insurer is likely to have is reinsurance. But per the discussion above, this is a huge market inefficiency; the insurance adds no value (but sadly appears to be necessary).

And who would buy the rest? The parties who best understand the CDO/CDS exposures and have reason to do a deal are already at the table. You aren't going to have new parties appear out of the blue. Private equity investors like TPG and Bain Capital predictably said no thank you, we don't understand this stuff. I'd be curious to know who might suddenly materialize.

It also isn't clear if there is any precedent for setting priorities among policyholdiers in this fashion, by industry.

A further complication is that Dinallo does not regulate #2 monoline Ambac; that falls to the state of Wisconsin, and Dinallo's counterparty there, Sean Dilweg, has been notably silent. And MBIA, the guarantor over which he does have authority, is fighting him tooth and nail. From a separate Bloomberg story on MBIA's remarks to be made at the same hearings:

MBIA Inc., the world's biggest bond insurer, said it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.

``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington...

``MBIA is more than adequately capitalized to meet obligations to policyholders,'' Chaplin, 51, said in his testimony.

Ambac said in a statement last night that Callen will tell the commit