The Big Picture

« Tigger Economics | Main | FGIC: Let Us Split in Two »

The Monolines Are F#@%ed!

Friday, February 15, 2008 | 12:41 AM

in Corporate Management | Credit | Derivatives | Short Selling | Taxes and Policy

If you had any doubts that the Monolines (Ambac, MBIA, FGIC) were f$%#ed before, well, they should be totally eliminated from your mind now. Consider the 3 body blows they have taken over the past week:

First, the non-offer offer from Buffett. It is astounding that some people thought of this as a bail out for these firms from Warren. It was nothing of the sort -- indeed, this was merely a sales pitch from an insurance man: "We'll reinsure your Municipal Bonds a 4X the rate you originally did."

The response: "No, thanks."

My opinion: Buffett never expected these guys to accept his terms. This was a clever, showboating tactic to show the state insurance regulators that Berkshire Hathaway (BRK) stood ready to step into the role of guaranteeing Muni bonds across the country. Call it a ploy, declare it a hollow gesture -- but recognize that it is a brilliant strategic move designed to checkmate the Monolines into giving up the high return, low risk business Buffett covets (and would do a much better job running anyway).

Second, the NYS Commissioner of Insurance has suggested splitting the Muni bond business off from the rest of the firm. What's left is can best be described as a poorly run, derivative hedge fund led by people who have no business running a hedge fund of any sort, much less one of the poorly run derivative variety. But the fact that the NYS insurance commissioner is suggesting this should tell you that this has reached a level of government involvement that cannot bode well for our friends at ABK, MBIA and FGIC

(Its almost an irrelevant afterthought that Moody's downgraded FGIC, pulling their triple-A credit rating today).

Now, the coup de grâce: The FT reported that Eliot Spitzer, former NYS Attorney General, now New York governor, gave the bond insurers three to five business days to find fresh capital, or face a potential break-up by state regulators who want to safeguard the municipal bond markets. Oh, and that was BEFORE Moody’s cut FGIC from to double AA -- effectively ending their ability to write muni bond business.

~~~

As I noted on CNBC Tuesday, these firms have become financial terrorists, holding the muni bond business as their hostage. They know what happens to bank robbers and bad guys once they let the hostages go -- they get riddled with bullets. If it wasn't for this end of their business, no one care on whit about these guys -- they are just another hedgie that blew up.

Gee, anyone still think Wilbur Ross will be riding to the rescue anytime soon . . . ?

UPDATE: February 15, 2008 6:27am

In response to several questions raised in comments, let's delve a bit deeper into the "Why."

Understand that this is not just any business; This is an extremely regulated insurance business that exists solely to facilitate capital raises by States and Municipalities to build State facilities for the public good.

They operate by the good graces of the State. No State approval, no business.

If the larger, more influential States -- NY, California, and especially The Port Authority of NY/NJ -- say, WE NO LONGER TRUST YOU, your recklessness has endangered our ability to raise funds thru bond issues to build schools and hospitals and bridges etc., then it is game over.

That is what is happening now; NY State wants to cleave off the all important muni bond business -- and leave the reckless, irresponsible portion to live or die on its own.

Previously:

Counter-Party Risk
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

Monoline Insurance: There's a New Sheriff in Town... http://bigpicture.typepad.com/comments/2008/01/monoline-insura.html

Sources:

Monolines given five days to find funds
Aline Van Duyn in Washington and Michael Mackenzie in New York
FT, February 14 2008 14:54 |
http://www.ft.com/cms/s/0/3b313712-db09-11dc-9fdd-0000779fd2ac.html

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