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.
February 15th, 200812:23 pm at
where is King Solomon when you need him?
February 15th, 200812:42 pm at
But FGIC is going to be doing just that!
February 15th, 200812:59 pm at
FGIC will try, but will they succeed?
February 15th, 20089:02 pm at
The state has the right to place the company into rehabilitation if its financial strength is impaired. The rehabilitator has pretty broad authority, but I am unaware of any precedent that would allow different classes of insureds to be treated differently.
February 15th, 20089:49 pm at
The right to rehabilitate is limited to situations where capital levels are perilously low. That may or may not be true here.
In rehabilitation policyholders have to be treated equitably, which is why rehabilitations of financial guarantors are so hard; I’ve talked about that before. In a real rehabilitation, claim payments would be delayed, and assets would build while an army of analysts figure out the likely exposures, and after that, a conservative percentage of pro-rata claims would be paid with a true-up payment at the end.