Split the Financial Guarantors in Two? You Can’t Do That.

This will be a brief note because it is late, but the state insurance commissioners lack authority to favor one class of claimants over another to the degree of setting up a “good bank/bad bank” remedy, where municipalities get preferential treatment ovr other potential claimants.  The regulators allowed the nonstandard business to be written for years, with no objection.  The insureds that would be forced into the “bad bank” would likely not have agreed to the contract had they known that the claims-paying ability of the guarantor would be impaired.

There is nothing in contract law that should favor municipalities over other claimants.  Now, if they want to modify the law prospectively, that’s another thing.  Create a separate class of muni insurers, distinct from financial guarantors that can guarantee anything for a fee.  Different reserving and capital rules for each class.

Now this doesn’t mean that New York won’t try to split the guarantors in two; I think they will lose on Ambac because it is Wisconsin-domiciled.  With MBIA, they will lose after a longer fight, because they don’t have the authority to affect the creditworthiness of contracts retroactively.