A Split of the Bond Insurers - Spitzer ("they have 3 to 5 days")
Eliot Spitzer to Congress on Friday: Regulators will step in if these bond insurers have not found a solution to their problems in 3 to 5 days!!! - WOW, threats with teeth!
So an interesting idea is surfacing - splitting the municipal bond portions of MBIA, Ambac and Fidelity Guarantee Insurance Corporation (FGIC) from the MBS portion. The crucial question for many banks is what will happen to these three companies' ratings. Right now two are still triple A (AAA) rated - so the MBS (Mortgage Backed Securities) AND Munis are too. (FGIC is A3, as noted below, but will lose further rating if the company does not move fast.)
IF the companies are split - WILL THE NEW MBS COMPANY BE AAA??! - I would argue no way! HOW can this new riskiest of companies be rated very highly? The level of capital must be extremely high, given the amount of foreclosures and loss of safety with the underlying securities (so called sub-prime home mortgages). (Note: a lower rating means a higher interest rate on bonds, read as greater risk, which therefore means a higher cost to the company trying to borrow capital.)
On the other hand, the Muni market - the municipal bond market, a crucial $2.3 trillion market for America's cities, counties and states (let alone utility companies), WILL clearly benefit and rise to an "in the clear" level - mostly, I would argue. (Article found on the New York Times on Saturday.) The Muni market is not part of the current sub-prime issues.
However - The saber rattling MAY just be a move by the companies to get the banks to provide a capital infusion so that these companies do not lose their high ratings. According to the WSJ, the banks only learned of the possible move on Friday by listening to CNBC TV! Previously, the banks had said that the split option was a last resort!
WHY? - Because such a split would most likely require further write-downs by the banks (moving certain loan assets into the non-performing category).
How did we get here? Very briefly, these Muni bond insurers have operated for years, mostly without us noticing. However, during the "MBS party," these insurers jumped on the bandwagon. Therefore, previously safe and secure assets (Municipal Bonds) became at risk BECAUSE the underlying insurance companies decided to take risks (add MBS to their assets). ... Sound familiar to those of you who know the Savings & Loan debacle?!!? However, there was less government involvement (regulation) in the insurance industry.
FGIC is leading the push as Moody's has already downgraded the company's rating to A3 from AAA - THAT'S SIX notches. FURTHERMORE, Moody's warned that FGIC may be downgraded to Baa (the lowest investment grade rating), if the "talks" do not soon produce a favorable result (read that cash infusion to FGIC).
From the Wall Street Journal (subscription req'd): "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." - Page A1, Saturday's WSJ
Note that MBIA and Ambac are public companies, whereas FGIC is a privately held company. See the two articles linked above for further info or email me. ... Stay tuned!
So an interesting idea is surfacing - splitting the municipal bond portions of MBIA, Ambac and Fidelity Guarantee Insurance Corporation (FGIC) from the MBS portion. The crucial question for many banks is what will happen to these three companies' ratings. Right now two are still triple A (AAA) rated - so the MBS (Mortgage Backed Securities) AND Munis are too. (FGIC is A3, as noted below, but will lose further rating if the company does not move fast.)
IF the companies are split - WILL THE NEW MBS COMPANY BE AAA??! - I would argue no way! HOW can this new riskiest of companies be rated very highly? The level of capital must be extremely high, given the amount of foreclosures and loss of safety with the underlying securities (so called sub-prime home mortgages). (Note: a lower rating means a higher interest rate on bonds, read as greater risk, which therefore means a higher cost to the company trying to borrow capital.)
On the other hand, the Muni market - the municipal bond market, a crucial $2.3 trillion market for America's cities, counties and states (let alone utility companies), WILL clearly benefit and rise to an "in the clear" level - mostly, I would argue. (Article found on the New York Times on Saturday.) The Muni market is not part of the current sub-prime issues.
However - The saber rattling MAY just be a move by the companies to get the banks to provide a capital infusion so that these companies do not lose their high ratings. According to the WSJ, the banks only learned of the possible move on Friday by listening to CNBC TV! Previously, the banks had said that the split option was a last resort!
WHY? - Because such a split would most likely require further write-downs by the banks (moving certain loan assets into the non-performing category).
How did we get here? Very briefly, these Muni bond insurers have operated for years, mostly without us noticing. However, during the "MBS party," these insurers jumped on the bandwagon. Therefore, previously safe and secure assets (Municipal Bonds) became at risk BECAUSE the underlying insurance companies decided to take risks (add MBS to their assets). ... Sound familiar to those of you who know the Savings & Loan debacle?!!? However, there was less government involvement (regulation) in the insurance industry.
FGIC is leading the push as Moody's has already downgraded the company's rating to A3 from AAA - THAT'S SIX notches. FURTHERMORE, Moody's warned that FGIC may be downgraded to Baa (the lowest investment grade rating), if the "talks" do not soon produce a favorable result (read that cash infusion to FGIC).
From the Wall Street Journal (subscription req'd): "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." - Page A1, Saturday's WSJ
Note that MBIA and Ambac are public companies, whereas FGIC is a privately held company. See the two articles linked above for further info or email me. ... Stay tuned!
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