Privately held bond insurer Financial Guaranty Insurance Co. (FGIC) asked the NYS Insurance department to allow them to cleave them in twain.
FGIC is closely held, owned 42% by mortgage-insurer PMI Group, with Blackstone and Cypress each having another 23%. (GE was one of the co-founders of FGIC, but sold their stake to PMI for $2.16 billion in 2003)
Here’s a great irony: The idea of doing this was first floated several months ago by my sister (no shit), who is married to a very senior FGIC exec. He’s a sharp attorney, but she’s even cleverer.
NYS insurance commissioner Eric Dinallo said on CNBC earlier, "As of this morning, we
received a notification from FGIC that they received an application to
have their business split in two. They sent that to the head of
property and casualty, Larry Levine, this morning."
The WSJ noted the following:
"Financial Guaranty Insurance Co., a major bond insurer, has notified
the New York State Insurance Department that it will request to be
split into two companies.One of the firms would likely retain much of the business of insuring
structured finance bonds such as those backed by mortgages, which have
come under severe pressure due to the housing market slowdown,
according to a person familiar with the matter.The other company would likely retain most of the municipal bond insurance business, which is stronger, the person said. Details of the precise structure are still unclear, but the plan could involve raising additional capital."
Now the question is, will Ambac (ABK) and MBIA follow . . . ?
>
Sources:
FGIC Will Request Break-Up
LIAM PLEVEN
WSJ, February 15, 2008 9:16 a.m.
http://online.wsj.com/article/SB120308290353671507.html
See also:
Statement of William A. Ackman
Pershing Square Capital Management, L.P.
February 14, 2008, House Financial Services Committee
Subcommittee on Capital Markets, Insurance and Government
Download “The State of the Bond Insurance Industry” William Ackman.pdf
NY regulator: Bond insurers may be split up
Dan Wilchins and Patrick Rucker
Reuters, Thursday February 14, 2:56 am ET
http://biz.yahoo.com/rb/080214/bondinsurers_dinallo.html?.v=1
Wow… looks like these guys blinked. Is this at all related to Spitzer’s threat, or is it simply a recognition of the obvious?
Gee, I wonder how they’ll divide up personnel….I’m sure all the bigwigs want to mirgrate over to the structured finance side. Right? Right? Uh, right? Uh, whaddya mean only the janitor isbeing packaged with that spinoff?
Todays cartoon strip BC pretty much sums up this situation. Picture/1,000 words.
“cleave them in twain” – that’s funny right there, I don’t care who you are.
From my blog (full post):
Let the Lawsuits Begin
February 15th, 2008
So FGIC requests to be broken in two. Personally, I expect that it stemmed from giving into strong-arming from the New York Department of Insurance and perhaps the Governor as well, but if I were FGIC, I would want to do this. Who wouldn’t want the option of splitting his business in two during a crisis, putting the good business into subsidiary A, which will stay solvent (and protect some of your net worth) and putting the bad business into subsidiary B, which will go insolvent, and pay little to creditors?
In many other situations this would be called fraudulent conveyance, but when you have a state government behind you, I guess it gets called public policy. The NY Insurance Department tries to sidestep a big insolvency by creating favored classes of insureds.
Those with concentrated interested in non-municipal guarantees should band together to protect their rights, and sue FGIC and NY State (seeking punitive damages) to block the breakup. The question is, who will be willing to bear the political heat that will arise from this, and oppose an illegal “taking?”
How can you split off the portion that insures cdo’s when it has no value. Or perhaps more accurately, it has no value that can be determined with any degree of certainty. Wouldn’t this also further collapse the cdo market and who steps in to rescue it? I’m sure that pin ball Paulson is on it.
Not sure there is any “irony” here but hardly surprising that your sister is smart. Maybe her husband was smart enough to listen?
Hmmm. Would set an interesting precedent. Everytime an insuror got in trouble with a particular product line, they could split it off from the performing assets. For example, if a terrible hurricane hit NY, Allstate could split off its property line. Sorta undermines the meaning of insurance. And would make a lot of work of work for lawyers, which is never a bad thing.
Barry,
The Big Picture’s Schadenfreude ‘O-meter is redlining today. Just Saying & David Merkel, thanks for the common sense.
if a terrible hurricane hit NY, Allstate could split off its property line. Sorta undermines the meaning of insurance
There is no free lunch. If you think your auto insurance premiums are underwriting hurricane insurance, you are deluded.
Insurance prices risks, underwrites and sets reserves against a class .
Back to you in your own terms – your auto insurance is not priced for the risk of having to rebuild homes that are damaged in a hurricane. That should mean something to you, if you got some stuff between your ears.
Separating the siamese twins with a chainsaw.
There will be much blood.
There may not be enough innards to allow the survival of one.
Both may die.
Barry, Barry, Barry…
Even a guy like you HAS to know that even though Company A and Company B are in the same business, they are not always in the same situation.
I will say this over and over and over again. The true economic risk in the monolines is claims paying capacity.
This split may be a good idea for FGIC but for MBIA and ABK it is a really bad idea, not just from a corporate governance point of view but from a credit market point of view.
The idea of insurance company is to SPREAD risk, not concentrate it. This fundamental precept is something that our current regulators have a hard time grasping. In fact, splitting these companies will increase the probability of a government bailout, and all its attendant consequences.
On what basis would assets be split?
Exposure? Past earnings? Future earnings?
With inadequate reserves to cover CDO losses now, the split would immediately collapse the CDO market.
And, has anyone run the numbers on possible municipal defaults in this fine new world we are in?
Just like other “financial innovations”, the municipal bonds are not your father’s bonds. Historical performance may be hysterically wrong.
Is it possible that the non-muni business would have any credit rating better than junk status? What would happen to the CDO market and wouldn’t this lead to a free fall of mortgage and other structured finance bonds as they lost their rating, banks were forced to take massive further writedowns and many holders of these products dumped them into the market? It would seem that the cost of shoring up the muni market is extremely high.
Repost from previous thread
Rick Said:
>Barry,
I am stretching to see how the State of New York could mandate a split off. There are preexisting contracts in place, maybe prevent future insurance? The fed would have a lot more power to toke global action, but where does New York get its power? Think like a lawyer here.
>
Insurance companies are regulated state by state to protect policy holders. They are usually required to have x amount of capital and have guidelines to restrict dividends to the parent company when capital is insufficient as well as other powers including shutting them down.
There is also precedent set by Connecticut and NY to litigate against these businesses.
Barry, Barry, Barry…
I know that it’s your blog, and you can do what you want, but I find it interesting that you link to Ackman’s statement, but don’t provide the link to MBIA’s counterarguments…
So for those who interested in seeing both sides of the arguments, here’s the link
http://investor.mbia.com/phoenix.zhtml?c=88095&p=irol-newsArticle&ID=1108409&highlight=
Two relevant paragraphs
[Ackman’s open source] model does not take account of the structures of CDOs and our contracts that provide us protections. The model does not appropriately capture the triggers and cash diversion mechanisms that support the senior interests, nor the fact that we cannot be compelled to settle contracts in 2 years, as assumed. The ultimate principal payments on many of our contracts will take place 30-45 years in the future…
It is asserted that by using internal estimates of credit losses, the bond insurers are somehow “determining the amount of statutory capital.” This is peculiar. All financial institutions who take and manage credit risk in buy and hold positions are required to make estimates of uncollectibility or credit impairment. MBIA has a rigorous process for determining the amount of credit losses in our portfolio of financial guaranty policies and our CDS contracts (it must be remembered that our CDS have the character of financial guaranty insurance policies, not tradable CDS as transacted by most market participants).
bullbust said: “Insurance prices risks, underwrites and sets reserves against a class .”
The question is, what happens when the reserves are not sufficient? Presumably the shortfall has to be made up by the company, though it may not be permitted to touch the reserves of another class. Can the company spin off a piece that only contains the losing class to protect it’s capital?
I smell a great lawsuit coming. I love it when the only people that make money in a bad situation is the lawyers.
FGIC Seeks Split to Salvage Municipal Debt Ratings
Feb. 15 (Bloomberg) — FGIC Corp., the bond insurer stripped of its Aaa rating by Moody’s Investors Service, asked to be split in two to protect the municipal bonds it covers, according to the New York Insurance Department.
FGIC, owned by Blackstone Group LP and PMI Group Inc., applied for a new license so it can separate its municipal insurance unit from its guarantees on subprime-mortgages, David Neustadt, a department spokesman, said in a telephone interview.
“This is the kind of thing we have to do” to ensure municipal bonds retain the AAA rating protection, New York Insurance Superintendent Eric Dinallo told CNBC Television today.
FGIC’s request follows comments by Dinallo and New York Governor Eliot Spitzer yesterday on Capitol Hill that insurers may need to be split if they can’t raise enough capital to compensate for losses on subprime-mortgage guarantees. FGIC, MBIA Inc. and Ambac Financial Group Inc. are struggling to keep their companies intact after taking more than $8 billion in writedowns.
“Other bond insurers will be tempted to follow suit, especially the ones that have already been downgraded by at least one rating agency,” said Donald Light, an insurance analyst at Celent, a Boston-based consulting firm.
Brian Moore, a spokesman for New York-based FGIC, didn’t immediately return telephone calls or an e-mail seeking comment.
MBIA, based in Armonk, New York, fell 63 cents, or 5 percent, to $11.99 at 11:10 a.m. in New York Stock Exchange composite trading. Ambac declined 63 cents, or 5.9 percent, to $9.90.
FGIC insures about $314 billion of debt, including $220 billion in municipal bonds. The bond insurers give AAA ratings to about $2.4 trillion of debt and the loss of that imprimatur would cast doubt on the rankings of thousands of schools, hospitals and local governments around the country. Ambac and MBIA, the world’s two largest bond insurers, account for about half the market.
Buffett Model
Dinallo and Spitzer at a congressional hearing in Washington yesterday said dividing the insurers was a last resort and urged banks to help put up capital for a bailout. New York’s regulators last month organized banks to begin plans for a rescue and are talking to private-equity firms and sovereign wealth funds, Dinallo said. The companies probably need about $5 billion and a line of credit for $10 billion, he said.
Dinallo’s office regulates MBIA and has taken the lead in forcing changes at the bond insurers. While Ambac is based in New York, the company is primarily regulated by Wisconsin. Dinallo said he is regular contact with other state officials as well as federal regulators.
The concept of a division into two business follows a model proposed by Warren Buffett. The billionaire investor this week said he offered to take over $800 billion of the municipal debt guaranteed by the three companies for about $9 billion.
Ratings Cuts
“You are either going to see capital infusion plans or some kind of a more dramatic structural change,” Dinallo said in a Bloomberg Television interview from Washington yesterday, where he testified at a hearing of the House Financial Services subcommittee on capital markets into the insurers. “A few months from now, the companies are not going to look exactly the same.”
Dinallo said a rescue may be in place before MBIA and Ambac lose their top ratings.
Moody’s yesterday cut the ratings on FGIC’s insurance units six levels to A3 and said they may be reduced again. FGIC itself was cut eight levels to Ba1, which is below investment grade.
Moody’s said it plans to complete its reviews of MBIA and Ambac by the end of the month.
CDO Expansion
The insurers are reeling from their expansion beyond municipal debt to collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk.
Banks, which bought protection for the CDOs, stand to lose $70 billion if bond insurers are stripped of their ratings, Oppenheimer & Co. analyst Meredith Whitney in New York said last month.
Concern that MBIA and Ambac may lose their top rankings has spread to the $300 billion market for auction rate securities. Investors, wary that the municipal debt they are buying may soon be downgraded, have fled the market, causing more than $20 billion of auctions to fail this week.
MBIA tumbled 82 percent the past 12 months and Ambac has declined 88 percent in New York trading as the value of securities tied to subprime mortgages they insure fell.
MBIA Chief Financial Officer Chuck Chaplin and Ambac Chief Executive Officer Michael Callen yesterday told the committee they don’t need a bailout or added oversight.
`Better Positioned’
Moody’s analyst Jack Dorer said yesterday that he plans to complete a review of Ambac and MBIA by the end of the month. MBIA has raised $2.5 billion of capital and Ambac sought insurance on some of its guarantees, making them “better positioned” than FGIC, Dorer said.
Moody’s is saying “they’re not on death’s door yet,” said Christopher Whalen, a managing director at Hawthorne, California-based Institutional Risk Analytics. “That’s unfortunately what the market’s been thinking, but these things are not going to collapse tomorrow.”
How will this fix the only serious underlying problem of under-capitalization?
Buffett’s outfit will be undercapitalized too.
I am must be missing something here.
Let’s split all their houses and cars in two, too. And their bonuses surely ought to be chopped in two.
Let them take their lumps like any individual investor who made a wrong decision would!!
FED and State governments will find a way to bailout the monolines, the money center banks and mortgage corporations. In the process they will continue to limit access to unemployment, food stamps and bankrupcy protection for individual citizens which speaks volumes about their priorities.
Hmmm…splitting it up , 1st brush yes (that is the number 1 thing everybody involved thought about when these problems arose ) so nothing revolutionary there !! In cold light of day , ain’t going to happen !! Who gets stuck with the counter party trades on the CDS’….friends, other side of the CDS trade are looking at the muni biz as collateral to payouts–trust me.
Only way it hapens is if US Gov’t guarentees those counter party trades. What are the chances of that happening?
I believe you are misunderstanding their concept of split – more like split to the Caymans, rather that into two companies is the more likely meaning.
This is NOT actually beimg taken seriously by anyone–other than the lazy group reporting to E Spitzer or the entertainers on CNBC, is it?
Before something like this could be anything other than a silly mid-month trial balloon of desperation, one should have checked with the creditors or at least a qualified bankruptcy attorney. It is apparent that they are responsibly concerned about being thrown into Chapter 7 bankruptcy, but to try to split into two will require at least 18 months in Chapter 11 bankruptcy protection.
Wfy do you think, Big Picture readers and contibutors, and/or Barry, this fact has not been acknowledged?
I have no position or near-term interest, but I am shocked at the lack of obvious challenges to some of the silly ideas (this might be the silliest) we have seen over the past 9 months.
2008 will be known for the year of “COUNTERPARTY SUPRISES”. Many “Players” will go to collect on debts.. and they are going to be surprised.. and “SHOCKED”.
Actually I think splitting the monolines is going to be big business for 2008 because: (i) the bond insurers don’t have to worry about chapter 7 or 11, because state insurance law overrides those. The superintendent of insurance can mandate splits, reconstructions or whatever he feels like. (ii) New investors only want to put capital in against the muni assets, so the insurers have to mortgage their quality income stream to pay off the “underperforming” assets. (iii) Wall Street wants fees for selling shares in the “new” monoline spin-offs…
Yes this will probably toast a load of players who bought protection against monolines defaulting, and never thought a “Succession Event” would occur in this industry. But hey, even short seller cannot win them all….