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.