The only way they can attract new equity, is to apply it to the traditional muni business. The hard part is adequately capitalizing the rest of the business. Absent sending the monolines through the bankruptcy carwash or a regulatory insolvency, creditors of the non-muni business will cry a fraudulent transfer that left it insolvent.

Get on with it already as I see it these companies can remain viable in their original business of munis. If they don't split the whole ball of string comes undone. The banks lose either way so what difference is it to them?

If your leg has gangreen ya cut that thing off before it kills you. Where did I put the bone saw.

Warren Buffet once observed that: "it’s the weak link that snaps you…in financial markets, the weak link is borrowed money." In the present credit crisis, all companies and business models reliant on debt – especially cheap and abundant debt - look vulnerable.

Some Playas' are gonna want to be paid...
they coreectly predicted this, and want there 1000% payoff...
they uuurrrnnnnddd it

Why can't the government step in and take responsibility for the bad part? A sort of Freddie Mac for bond insurance?

They are trying to salvage the muni business so that governments can continue to have access to credit.

re-written as: so that governments can continue to overspend on what Kunstler would call the eyesore of the month.

This is a matter of entropy, e.g, as CR states. "This really is unscrambling the egg."

Re: For example, if a bottle of perfume were spilt, the molecules would generally diffuse throughout the entire room. However, we can never take a room with diffuse perfume molecules and expect that they would spontaneously congregate into the bottle of perfume. This is an example of a reaction that is asymmetric with respect to time.

Thus some may assume that massive amounts of lipstick on this pig will produce a better smelling pig, but even if our financial engineers are capable of cloning this pig into two pigs, we still have the DNA of the first genetic mutation and thus, even if we fragment this clone into further derivatives, we still are only replicating the cancer and in fact causing the mutation to expand, and interestingly enough, the more times we expand this monster the more mutations and weak links will at some point snap like a weak bridge, yah!

When tax revenues this year collapse, muni bonds markets go with it. There is no escape.

Solomon said: Split the baby in two and see who howls.

NSA,

Re: cell division

... our data thus provide direct evidence for the concept articulated more than 25 years ago that evolution drives human neoplastic progression.

Re: Neoplastic progression is an evolutionary process characterized by genomic instability and waves of clonal expansions carrying genetic and epigenetic lesions to fixation (100% of the cell population). However, an evolutionarily neutral lesion may also reach fixation if it spreads as a hitchhiker on a selective sweep.

The egg will probably get more scrambled now that ABK probably will follow FGIC in splitting the muni side from the toxic waste...

In the summer of 1977, Jones and most of the 900 members of the People's Temple moved to Guyana from San Francisco after an investigation into the church for tax evasion had begun. Jones named the closed settlement Jonestown after himself. His intention was to create an agricultural utopia in the jungle, free from racism and based on socialist principles.

However, because there is much ambiguity regarding whether many who participated did so voluntarily or were forced...

Rob Dawg,

I sit here stunned all the time on this issue.

1. Muni's are NOT safe. They do default. I shall post it again:

"In 1988, a study by Enhance Reinsurance Co. looked at historical patterns of municipal defaults from the 1800s to the 1980s and concluded that municipal defaults usually follow downswings in business cycles and are also more likely to occur in high growth areas that borrow heavily."

"n 1999 Fitch Ratings published its first study of municipal defaults, which was updated in 2003.2 The latter study covered 2,339 cases of municipal defaults worth $32.8 billion between 1980 and 2002. It found that the cumulative default rate on bonds issued through 1986 (as they approached or reached maturity) was 1.5 percent, while the cumulative default rate on bonds issued between 1987 and 1994 was 0.63 percent."

Note the END OF THE BUSINESS CYCLE!

1. The monlines do not have CDO's. They INSURED them. They did this through complex derivatives. For simplicity sake call the CDS.

The question is will calims to pay off CDO's overwhelm the cash flow and capital of the CDS (CDS market now is horribly illiquid).

As rich said, the split, even if it is legal, which is seriously challenged right now, would have to be equitable. This means that the toxic crap can't be shoved into one entity and the "good" into another. That would be contractually unfair to those who bought insurance on the "bad" side.

So, in essence, you are unscrambling an egg. That's the point of the analogy!

Cheers,

rich - "Because during an election year when Congress is controlled by a minority party "of the people," the public outrage at such a bailout would be enormous. The Republicans, in their weakened hanging-on state, wouldn't even try it."

Don't go all-in betting it doesn't happen. I think the odds are something along those lines will be done. Just kicking the can down the road, but no way all the IBs & MC banks are going to be able to take that hit. At least this is a single entity bailout that covers all the big boys. They can't let it get past this point.

It'll be interesting for sure. This 3-day weekend should be a busy one.

If the economy doesn't improve materially or weakens from here (my expectation), I would not be 1 bit surprised if muni defaults start chewing up what capital the fragmented monolines have left.

This really is where the rubber meets the road on the gutted US economy. In a corner 1000000 ways.

Kudlow say no recession, Goldilocks lives LOL!

If FGIC sold off its "good book", would the proceeds be sufficient so that their bad book be adequately capitalized? The owners, Blackstone, etc. would not come out well, but it would stem the write-downs by the investment and commercial banks.

Could not the same approach be used at MGIC and Ambac? The bad books probably run off, but the insureds are still covered and the losses minimized.

I would think the insureds claims would have to come before the shareholders. The insurance holding companies basically go to zero, but the systemic nature of the problem is averted, at least temporarily.

"If you had the choice of a AAA rated GO bond or a AAA rated subprime bond, where would you choose to place your funds?"

Neither. Swiss bank alongside those Jew gold teeth

Ill tell you where this all gets real: DeSoto County agreed to construct a water and wastewater facility and to extend utility service to the site at a cost of $20 million. The improvements were financed with county, state, and USDA funds. The state provided a $2 million Economic Development Transportation Fund grant for road construction. Wal-Mart was made eligible to receive tax credits for locating in an enterprise zone, including a Jobs Tax Credit, a sales tax refund for construction material, and other tax incentives. It was also to receive Qualified Target Industry credits, which include a minimum of $3,000 for every job created, equal to at least $1.8 million overall. No dollar estimate for the total value of the state credits is available.

Dr Suess | 02.15.08 - 10:35 pm |

I know exactly where this is...You should see the uninhabited industrial park just a couple of miles from there. It also has some type of tax credit for jobs... You should see the permit fees for the county !!

Chris

"As rich said, the split, even if it is legal, which is seriously challenged right now, would have to be equitable. This means that the toxic crap can't be shoved into one entity and the "good" into another. That would be contractually unfair to those who bought insurance on the "bad" side."

heh heh, I think it depend what model they are using to evaluate the two proposed parts of the company. As late as last week, ABK and MBI are still saying that they don't have any problem paying any future claims. So why would separate into two company introduce the porblems?... .

We have 2 issues here. The first one is the rating and the second one is the ability to pay the claim. CDS are pay on an ongoing basis (i.e. they pay the missing interest and at the time CDO mature, pay the principle). So the question hers is how can the banks prove that the separate company will be insolvent if the newly separate company meet all the regulatory capital requirement? The fraudenlent conveyance claim is 5 years. So if the newly separated company can last 5 years, there is no claim what so ever.

The Insurance attendant believed he has the authority to force such a change. And it does not look like anyone challenge the autority.

Rating is all together another issue... No position on any of the names.. Just watching on the sideline... lawsuit is not going to be good for the banks or anyone (remember banks need to raise capital in this environment as well... Can they raise capital if they have a big legal issue pending out there and they are fighting the government?). I think it will be a negotiated settlement and the settlement will be making sure that the CDO companies has enough capital to pay all the claim over time. It means either the bond insurer raise capital or they go to uncle Warren for re-insurance and release their capitals tie up in the muni area to the CDO company...

The key thing is the unearned premium reserve. This is money collected from munis and 'earned out' or amortized over the remaining life of the bonds.

The unearned premium is largely from munis, who prepay for insurance. The unearned premium is calculated bond by bond, so it is possible to 'unscramble' this asset.

For FGIC it is $1.4 billion.

However it would take the 1.4 billion plus capital to keep it at AAA. They could either try to raise the additional capital from new investors or bring some of the capital over from the FGIC's reported stockholder's equity of $2.4 billion.

Buffett offered to reinsure it for 1.5 x the unearned premium reserve. or an additonal $700k.

i suppose that FGIC could move over some of the capital and then give some stock in the new insurer to the old/bad FGIC. As far as I'm concerned, they could give the old company all of the stock.

It isn't all that difficult.

After the split, the old piece loses its rating, but it might actually take a fairly long time before it runs out of cash.

Remember the 'back of the envelope' estimate that took the expected losses x 3 to get it up to AAA. The problem that can't be solved is getting the bad/old part up to AAA. If for no other reason than there isn't a solid number.

If the unearned premium reserve weren't identifiable, then this would be much more difficult.

"One of government's chief internal watchdogs resigned yesterday, as Comptroller General David M. Walker, an outspoken gadfly and frequent witness on Capitol Hill, announced his plans to lead a new foundation focused on U.S. fiscal responsibility."

This is big news. Mr. Walker is WALKING AWAY! Shitstorm is coming.

Rich writes:

"But the banks do have rights that the department is required to protect, the same as municipal policyholders. The department will have to exercise fairness toward all insured policyholders and beneficiaries, and the rights of other entities (such as the public, the markets) have a lower priority."

Whether FGIC splits or not is immaterial to any case the banks might make; FGIC is insuring the CDOs based on assurances the banks gave them. For the banks to argue that one part of FGIC cheated them because FGIC insured something the banks knew--or should have known--was garbage, is about the lamest excuse for litigation I can possibly imagine. A bankrupt CDO portion of FGIC might countersue, assisted by NY State, and win, on the argument that the banks misrepresented the nature and risk of the CDOs. It's like an arsonist suing his insurer after lighting up 10,000 of his properties.

While explaining this whole mess to my better half, it occurred to me that this can and will be done for one reason and one reason only -- because without it, the muni market is dead, and there's no way in hell the government will allow itself to be cut off from the money trough. I repeat -- NWIH.

It doesn't matter what happens to the non-muni side; heck, it doesn't really matter if the muni side is that great either. What does matter is that as long as there's uncertainty the money's cut off.

Don't get between government and it's money.

Although Blackstone wouldn't like it, giving 100% of the stock in the new company to the old company would eliminate issues about division of assets, since the sum of the two pieces would be worth no less then the whole.

The current owners might not be too happy. But in the unlikely case that there is enough money in total, they would get what's left.

It's just a tranche.

Implementation of the $250 million financial plan for the new airport will
require Bay County officials to work closely with federal and state
agencies, underwriters, counsel, and other financial intermediaries, as
well as real estate developers. These activities may include obtaining
FAA and State of Florida grants, sale of the present airport, a bond
issue to leverage an FAA letter of intent (LOI), a general revenue bond
issue to be supported by airport revenues and passenger facility
charges (PFCs), and obtaining other sources of innovative financing,
including donation of the land from a private developer.

I like that nice idea of a land donation....very sweet!

These guys have the bond insurance problem worked out, its a matter of job creation; its the economy dumbshit:

Pre-approved applicants
who create employment in Florida generally receive tax refunds of
$3,000 per job (or $6,000 per job in an enterprise zone or rural county)
provided that the company pays at least 115% of the state, metropolitan
area or local average wage rate and creates at least 10 new jobs, Firms
paying 150% of the area’s average annual salary may add $1,000 per
job; those paying 200% of the average may add $2,000 per job.

I have problems in Wisconsin in regard to bond insurance...shocking update:

The Court then made several observations regarding the Commerce Clause, which grants Congress the power to regulate commerce among the several states, and also embodies a negative command forbidding a state to discriminate against interstate
commerce. This negative or dormant aspect of the Commerce Clause prohibits economic protectionism, i.e., regulatory measures design
to benefit in-state economic interests by burdening out-of-state competitors. Further, the Court noted that state laws discriminating
against interstate commerce on their face are virtually per se invalid.

Spitzer can force Wisco to play ball!

You do see that right??

when a sovereign acts as a consumer or vendor in commerce, its actions as a market
participant are distinct from its actions as a market regulator, and thus, a state acting as a market participant may constitutionally act
without regard to the Commerce Clause.

Norka....

I think having Elliot Spitzer behind a deal as well as Andrew Cuomo would be a strong incentive not to mess things up.

Cuomo is already investigating everyone involved.

They could just ratchet up the charges if they think someone is f'ing with them. It's the way they do things in NY.

This litigious shitstorm will have to be averted because of the possibility of fraud on the IB part in the way that the way the CDO business was created versus the the way the CDO business was presented. But the is begs the question as to the role the rating agencies played in directing the level of the wrap.

This situation looks like this..Stand off

YouTube - The Good The Bad and the Ugly Finale

Cheers,

Wikipedia gave me a list of categories. Where are we now?
* Mexican Standoff
* Truel
* Duel
* Mutual assured destruction (MAD)
* Battle of attrition
* Winner's curse
* Heroic failure
* Prisoner's Dilemma
* No-win situation
* Win-win situation
* Pyrrhic victory
* Chicken (game)

Roubini makes the same points that we all have:

1) They'll save the muni business because government has to have access to money; and,
2) The muni business is a minefield in it's own right.

Spitzer's 5 days are likely for real, and it's not due to looming downgrades. More likely every municipality in the state is screaming for the state to "do something" and do it now.

Does anyone know to what extent the rating agencies directed the level of insurance for the tranches and what the due diligence would have been?

Hmmmm...

Gramm Leach-Bliley

GLBA § 104(e)(3) provides in part:
"Except as provided in any restrictions described in subsection (d)(2)(B), no State may, by statute, regulation, order, interpretation, or other action regulate the insurance activities authorized or permitted under this act or any other provision of Federal law of a depository institution or an affiliate thereof, to the extent that such statute, regulation, order, interpretation, or other action –

The Office of General Counsel issued the following opinion on June 17, 2004, representing the position of the New York State Insurance Department.

few commenters opposed to preemption asserted that the OCC should not findthat federal law preempts the Massachusetts Law provisions because state insuranceregulators are, pursuant to GLBA, responsible for the functional regulation of thebusiness of insurance. The GLBA expressly provides, however, that the states’functional regulation authority over insurance activities is subject to federal preemptionstandards as incorporated in section 104. 10 In particular, the question whether a stateinsurance sales law applies to national banks is resolved by application of the federalstandards to the state provision in question.

Section 305(g)(2)explains the relationship between these regulations and state laws that are in effect in that jurisdiction.Pursuant to section 305(g)(2), these federal regulations do not override inconsistent state laws unless theagencies jointly determine that the federal regulations provide better consumer protections than the stateprovisions. The state then is given up to 3 years to override that determination. Section 305(g) relatessolely to the preemptive effect that is to be given to federal regulations promulgated under section 305(a).By its terms, it does not relate to the preemptive effect that is to be given to other federal regulations orstatutes. In the insurance sales area, this is determined pursuant to section 104 of the GLBA and theBarnett standards it incorporates, as explained in Section II of this letter.

In closing, cheese:

The Court recognized in Barnett that not every state law that affects a national
bank activity “stands as an obstacle” to the accomplishment of the federal purpose:
In defining the pre-emptive scope of statutes and regulations
granting a power to national banks, these cases take the view that normally
Congress would not want States to forbid, or impair significantly, the
exercise of a power that Congress explicitly granted. To say this is not to
deprive States of the power to regulate national banks, where (unlike here)
doing so does not prevent or significantly interfere with the national
bank’s exercise of its powers. See, e.g., Anderson Nat. Bank v. Luckett,
321 U.S. 233, 247-252 (1944) (state statute administering abandoned
deposit accounts did not “unlawful[ly] encroac[h] on the rights and
privileges of national banks”); McClellan v. Chipman, 164 U.S. 347, 358
(1896) (application to national banks of state statute forbidding certain real
estate transfers by insolvent transferees would not “destro[y] or hampe[r]”
national bank functions); National Bank v. Commonwealth, 9 Wall. 353,
362 (1870) (national banks subject to state law that does not “interfere
with, or impair [national banks’] efficiency in performing the functions by
which they are designed to serve [the Federal] Government”).

In this portion of its analysis, the Court describes the boundary of the preemptive scope
of the federal laws authorizing powers for national banks by describing circumstances
under which a state law has been found not to stand as an obstacle to the accomplishment
of the federal purpose.

Buffett will watch, from Omaha, as bond reinsurance companies are restructured and what you see in Florida is what you will see in this example, they will divide up the loot and contain chaos; Warren will wait in line with everyone else!:

Compliance with both statutes, for example, may be a “physical impossibility,”
or, the state law may “stan[d] as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.

To say this is not to
deprive States of the power to regulate national banks, where (unlike here)
doing so does not prevent or significantly interfere with the national
bank’s exercise of its powers.

This seems all seems insane, that FGIC is suddenly re-inventing its business and essentially trying to take all its debt off the books and dump it off into its own toxic CDO. Its an insane game where they just want to write of, and then be unaccountable for 50% of their mis-managed business.

Why would any retard continue to invest in them or use them; why would any retard trust a rating agency? Why would any retard trust an Insurance board or a Senator, a Treasurer, a CEO, CFO, any regulator, any auditor, any accounting firm, any FASB/GAAP misinformation, and SEC, DOJ, DOL.........

I think I liked me better as Dr. Suess or even DHE.....what a waste of energy!

That's a good point, the muni business isn't captive. So the IBs can't expect much here, only a small bit better than that scenario where all the muni business just leaves the monolines.

It won't be enough to pay the IBs off for their CDOs but it's all they can probably get.

Allen C,

A pre-packaged BK was the term I was looking for earlier. Regardless, I don't see ANY circumstance wherein the CDO side can maintain a triple-A rating. Do you think Spitzer & Co. give a damn about anything but the muni side?

Gotta keep reminding myself that AAA means the ultimate level of safety -- same as Treasuries. There's just NWIH the CDO side can keep that, especially since the current fiction is only maintained by the muni side.

"What's the total worth of CDOs insured by FDIC?"

As Dr. Alfred Lanning said, "That, detective, is the right question"

This wold force a market valuation of CDO's.

I received a spreadsheet from a CDO dealer with the attached comment:

"Moody's and S&P have largely caught up with Fitch in downgrading ABS CDOs. Fitch has downgraded the ABS CDOs they rate an average of 9.5 rating notches, Moody's 7.6, and S&P 8.3 notches."

Think about that, 8 notches. That is AAA to Baa3.

Good thing the rating agencies have full clarity about the housing bubble being over and know exactly what is going to happen to the economy.

ABK CEO-

"“We’re looking at that as an alternative,” says Callen, “because we have to. We have a triple A business on the municipal side. And it’s a very different business from structured finance. It’s a very different risk. So clearly one has to look at that.”

as I said, everyone in this space has lost control of the situation and is now being led into the eventual outcome by the regulators. The "because we have to" statement says it all.

Will Ambac Split In Two? - CNBC

Bob: I think what you're looking at is more along the lines of: you're a homeowner in the Northeast. Do you keep your insurance with a company with a bunch of exposure on the Gulf or do you shop around for one that has little or no Gulf exposure? You probably do the latter. I would guess if municipalities had a choice between bond insurers with mortgage exposure and fresh, clean ones without (whether through Buffett or split-offs of existing monolines) they would go with the latter too.

Ellen-

agree.

Bob, I think a number of people have pointed out ways that this could work without facing the sort of legal obstacles you mention. Making the new muni bond company a subsidiary of the old insurer, for instance. That way, the structured finance policy holders aren't getting screwed out of any capital. What they get is just filtered through another layer, or retrieved during a bankruptcy.

I have no doubt that this isn't the sort of structure that the CEOs of FGIC and Ambac are pushing. They want to escape with some equity intact. I suspect, however, that they are going to be told to take what they are given, and like it. Their attempts to stay at the front of the pack are amusing to watch, though.

I'm intrigued by the idea of Spitzer as Barack Obama's US Attorney General.

Mike, agree, the markets are adjusting to the reality of the situation very quickly.

I liked this PR in regard to direct deposit-

Auditor General Jack Wagner Announces Direct Deposit of State Aid to Municipalities

Yep, you nailed it Fair Economist: without insurance that people are comfortable with, the muni market just locks up. At say a 20% rate, a lot of these projects don't make sense.

There are a lot of comments in this thread that run along the lines of, "screw the munis, let the market sort itself out."

That's well and good if you are posting from say Dominica, but for those of us living in the states, having a disruption in the muni credit market would be a VERY BIG THING.

Basic infrastructure just doesn't get done without these bonds. Yeah, there's some flab like monrail systems that go to nowhere, but generally its stuff used on a daily basis by us all.

You just can't magisterially dismiss the effect of a muni credit vapor lock, unless of course you're a UnaBomber kind of fellow who has decided to head for the hills to return to a 19th Century lifestyle.

Thanks to everyone for their thoughtful posts on this topic.

It seems that the bankruptcy process is best suited for splitting these companies in two. That process exists for the very reason of preventing a "land grab" by the competing interests. In this case, "competing interests" doesn't begin to describe the situation.

The problem is that the companies may not qualify for bankruptcy unless they turn around admit much higher loss expectations on their guarantees. To do so, however, would expose them to Sarbox jail time ("sorry folks, we were lying when we said we were solvent") for the Officers and Directors. Not a good outcome.

That leaves regulatory receivership as an option, at least for MBIA. The problem with that is a) Wisconsin would have to go along with the same plan for Ambac -- doesn't do any good to the ARS market to fix half the problem; and 2) The regulatory action would be challenged by the insured parties and the result would be lengthy, messy, and not confidence-inspiring. Doesn't mean they won't try it, only that it may not have the desired cleansing effect on the ARS muni market.

I don't buy the plan that says the banks will receive such-and-such in return for their buy-in to split the company in two: there will be parties that don't go along with that, they will litigate, and the judge will have to respect their interests as party to an insurance contract.

Gary-

WTF do you think I have been alluding to all along?

(disclosure: long Ambac; I'm biased )

I don't think splitting up the monolines is going to work due to legal issues (I'm not a lawyer of any sort). Splitting up the company is actually attractive from a shareholder point of view. The reason the companies didn't do that before is probably because they didn't have any legal right. Now that the State of New York is providing legal cover (all the lawsuits will be directed at the state instead of the monolines), it is somewhat attractive to the monolines. The reason it can be attractive to shareholders is the value of the muni bond side is far higher than the market price of the combined company. The muni bond business can write business (assuming they keep an AAA rating) whereas the structured product side is completely falling apart. If you can magically ignore the bad liabilities (the state is providing the legal cover here), the muni bond business can do well. Shareholders may lose a bit inititally but I don't think these companies will consider voluntarily splitting up if it wasn't in the interest of shareholders (companies like PMI and Blackstone, the owners of FGIC, clearly know what they are doing).

NOT TOO HARD TO SPLIT THINGS

Splitting up the company shouldn't be too hard. The contracts that are written, the collected premiums, the rates charged, etc are very different. Most companies use different subsidiaires to write the different types anyway. Without knowing any of the details I think a split will likely result in spinning off the muni bond business and going into run-off (basically liquidiation/bankruptcy) with the structured product side.

Contrary to the popular view here, the muni bond business may not need much additional capital, if any, to get an AAA rating. It depends on how the excess capital is divided up of course. All the rating downgrade threats are due to the structured product side having a negative impact. If you can lose the bad side, it may not require much to get an AAA rating for the muni side. Although, I'm not sure how easy it is to get back a rating. It is easier to lose a AAA rating than get it back, and given the credibility issues that rating agencies are fighting for, they may not want to give an AAA rating. In such a case, I suspect the New York government will have to "strong-arm" the rating agencies to give a high rating. Otherwise all this seperating will accomplish nothing.

MUNI BONDS SHOULD DO OK

Some people here are bearish on muni bonds and think default rates will go up due to a slowing economy. That's true but, remember, the insurance companies are not in the business of taking no losses (although that's kind of the goal). Rather, they are in the business of pricing risk. These companies have been in business for decades (on the muni side) and everyone knows that muni defaults will increase during economic weakness. If they priced their risk properly, a few defaults here and there won't mean much.

Having said all that, this plan is doomed to fail. I think this could be one of those rare cases wehre the government, even a powerful one like the State of New York, will fail.

WHY THIS PLAN MAKES NO SENSE

This is just my opinion and I could be wrong (have been for months) but I really don't think the regulators, as well as the governor of New York, know what they are doing. As usual, the government comes in blazing with guns a little bit too late after the bank has been robbed and arrests everyone in sight. There are a lot of problems with the split. I'll just mention one big issue no one here seems to understand.

A lot of people here seem to reduce everythign to "muni bonds" and "subprime mortgage bonds". Given the bears that number here, it isn't surprising that many want to see the "big bad banks" take losses on their RMBS, CDOs, and CDO-squareds. Here is something for you to think:

The structured products side contains ABS of assets other than RMBS. Ambac, for example, has most of the non-RMBS ABS exposure in student loans and auto loans (MBIA has more of it in credit card loans, etc, not to mention CMBS). All these parties are going to get screwed too. This is why the state of New York is going to lose. When all the buyers of insurance on these products, on top the subprime RMBS and CDO buyers, sue, I don't see how they can carry out the split. The state probably has to compensate all the ABS insurance buyers.

FINAL NOTE

Government intervention generally hurts free market participants, both long and short. This could be one of those cases where shorts like Bill Ackman end up with massive losses, along with the longs. I wonder what happens to the CDS of the monolines that Ackman is long. The muni bond business will never go bankrupt in such a case so he will never really collect on his big bet. (but it depends on how the holding company is split and how the CDS contract, as well as put options, and his short position in stocks, are handled. Of course there is a possibility that equity will be wiped out and the holding companies will go bankrupt).

Rather than pay 20% they should have hawked the bonds to riders on the #4 train at 8%. I bet they'd have sold them all before the train got to Wall Street.

No matter how this turns out the world of structured finance is hosed. IF money is available at all, spreads will be much wider than in the past 5 yrs and it ain't coming roaring back, discouraging a lot of projects. Translates into a lot slower economy with job losses and negative growth for years concurrent with inflation and higher long term rates.

Rerun of That '70s Show.

Linear Algebra,

Thanks. I hear you on the "blood from turnip" aspect of litigation.

Question: what about the justification for receivership? Are the regulator's powers broadly defined ("act in the public interest") or narrowly so ("act when insurer becomes insolvent")?

The reason I ask is that, in this case, proving insolvency is quite difficult. But then maybe, in the case of insurers, that's always the case.

David-

"How will the regulator prove that MBI does not have sufficient claims paying ability?"

This is a primary point that I feel many are missing, I do not believe the regulators need to prove this. I believe that all of the insurers need to be able to write new business, this is where the problem lies, in order to do so, they need the ability to maintain an uncontestable AAA rating, in my opinion, what you will see is that this is impossible without a government backing of the entire entity which I believe is not likely due to market solutions that have been presented, whether most realize this or not, the models as they currently exist are broken, the common shows you this, and confidence has been lost likely forever without the government backing.

The going concern qualification would exist if the ability to write new business is in fact compromised, ask yourself what the potential of this aspect of their business is going forward. If they cannot, then, my opinion is the regulators have all the reason they need to force a breakup.

On consideration FGIC may be the only BI who could reorg without much contest due to the 3 large holders. My stunning will be reserved for Ambac and MBIA then.

Risk Capital,

In other words, all the regulators need to go ahead is a ratings agency downgrade. They can claim there is no ability to write new business, there are no future profits to pay claims, and the companies are therefore not going concerns.

So basically we can look for the ratings agencies throwing in the towel Tuesday or Wednesday to begin this process.

You and Linear Algebra make a persuasive case, but I still think the positive impact on the muni market would not be assured unless they bring in Buffet or Ross. The CDO insurance, however, is assuredly toast.

David-

"You and Linear Algebra make a persuasive case, but I still think the positive impact on the muni market would not be assured unless they bring in Buffet or Ross."

I do not think this solution is limited to Buffet, I believe that Buffet & Berkshire are not the only choice, the question is who else wishes to be involved who has the credit quality to support the overhaul that the industry needs. I honestly do not have any idea how a Ross investment would accomplish the end goal of confidence & stability (let me qualify that as over the long run). Maybe someone else could support a Ross solution as being long-term supportive, I just cannot see it.

Also, understand that this is only opinion and I have no understanding of the legal underpinnings surrounding the current proposed split(s).

Which comes first - breakup of the BIs or ratings downgrades by Moodys & S&P?

I would think they need to be downgraded first to force the issue and allow the regulators to step in on more firm footing as these organizations' future ability to generate new business gets trashed.

One more thought that I have stated previously, in the beginning & the end, the first priority is the stability of the banking system and the proper functioning of the markets.

That said, in my opinion, when all is said & done, there will be bodies lying everywhere, but, it ain't gonna be at the top.

Tough period ahead, but manageable.

If this 'end game' works out for the munis, then the insured muni junk bonds will regain their ratings.

This could work out very well for speculative buyers of junk munis.

Along the lines of Tanta's "Sauce for the goose" post and with this post in mind I'm considering going to one of these new Clone-your-pet places and having myself cloned. My clone will assume all my, er "our", liabilities and I will keep all of "our" assets. Since clones don't usually live long I'm also wondering if our life insurance policy will pay me when I die. I need advice from my attorneys about all the legal details but the sun is still shining and they never come until after dark. If this works out I'd say that a strategic thinking, big picture kinda, executive like me, has earned his bonus this year. It's tough being creatively productive, certainly something those little human resources would never understand.

"The State of New York has one tremendous advantage over the Wall Street boys who might sue them: they have guns. "

Very good point! How many divisions does Wall Street have? (with apologies to the Pope and Stalin).

I think there is also another important point which needs to be made: with a split in the munis, there will be a lot of foreigners among the bagholders, i.e. the policyholders of the non-muni stuff. Look at the eight banks who were in talks to support the monolines: Royal Bank of Scotland, Barclays, UBS, Société Générale, BNP, Dresdner, Citigroup and Wachovia. Only two are American. Six of them are foreign banks. So of course any red-blooded American official is going to go for a solution which shifts the maximum amount of pain onto foreigners. You can take this as a blueprint for how Americans will treat any of the systemic problems of the future (e.g. with the GSEs) - opt for the solution which minimizes domestic pain and maximizes the share of the losses that foreigners bear. They should never have been dumb enough to lend us the money in the first place, right?

"skeptonomist writes:
What exactly is the risk to existing conventional (not "creative") munis and muni investors? If Warren Buffet or some rump company will insure them again aren't they just out the price of insurance even if current insurance is totally written off - or is there some other risk?
skeptonomist | 02.16.08 - 9:53 pm | #"

Buffett is rewrapping at 200bp.

If you have to have AAA, then this could be cheaper then selling into a thin market.

So, the solution seems to be for Spitzer to force FGIC to sell the Muni business to BRKA by paying 700M.
This seems to me to be inevitable from the thread above - The Show (Muni money) must go on...and this is the cleanest way (even cheapest way in the long run) to do it. Spitzer will give cover for FGIC to take BRKA's offer. (The involved parties should not be stupid enough to sue Spitzer for this).

The remaining equity may buy some time for FGIC to hope that the CDO losses may turn out to be less than anticipated...It is a dim hope, but FGIC is technically already dead anyway, so any hope is better than no hope, with more messy lawsuits and potential problems to directors, officers, etc. if they try their spinoff idea.

The sooner this is done, the less damage to the muni market.

Why do I get the feeling Buffett knew this eventuality was going to happen?