Let the Lawsuits Begin — II
Consider this article from the WSJ, Bond Insurer Seeks to Split Itself, Roiling Some Banks. The banks will fight this. Here are some quotes:
The move may help regulators protect investors who have municipal bonds insured by the firm. But it could also force banks who are large holders of the other securities to take significant losses. Some banks that have been talking with FGIC in recent weeks to bolster the firm were taken aback by the announcement and could yet try to block it, say Wall Street executives.
and –
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.
now, it could lead to:
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 –
However, if a breakup is endorsed by the New York Department of insurance, that could limit the legal liability.
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.
To the extent that the NY Department of Insurance limits the legal liability of PMI, they raise their own liability. If I were one of the banks, I would sue the State of New York, and quickly, because NY is moving more quickly than they ought to. There is no NY crisis here, and the politicians and bureaucrats of New York should behave as gentlemen, and not thugs.
Now, one thing I would agree with the NY Department of Insurance on is this: no dividends to the holding companies. Until things stabilize, retain assets at the operating companies in order to make sure that claims can be paid. If MBIA and PMI go broke, that is no great loss, except to those that hold equities, or holding company debt. But if the operating subsidiaries go broke, that is significant to those who will make claims against the companies.
February 16th, 20089:20 am at
There is a crisis as far as the state of NY is concerned, the Port Authority is paying 20% for short term paper. Moreover, politically, they can’t stand by and let the entities that they regulate, the monolines, become the transmission mechanism for spreading the debt follies to the muni market.
Spitzer is a thug. He proved that in his prosecution of Wall Street as AG. Facts be damned, he tried people in the media. Look at his record actually litigating, not very good. He is the classic bully, this is his M.O.
February 16th, 20083:19 pm at
There is only a modest problem here. Auction rate bonds are a small part of the market, and good credits like the NY Port Authority can easily refinance the debt. They won’t pay 20% for more than a week or two, and it’s not their whole funding base.
Part of the difficulty here is that auction rate structures are unstable. They can handle 30 mph winds, but not 60 mph winds. Auction rate structures deliver low rates when things are calm, but can be toxic when short term liquidity dries up. A sophisticated borrower like the NY Port Authority should have known that going in. Small borrowers are another matter, their investment banks should have explained the risks.
Yes, the explanations are all there in the documents, but a good advisor explains things in layman’s terms. That said, it is usually the shortsightedness of local governments wanting low rates and long term funding at the same time that really causes this. You can have one or the other, but not both with certainty.