The endgame for the monolines is upon us.
As reported in the Wall Street Journal and the Financial Times, New York governor Eliot Spitzer, in testimony before the House Financial Services committee, said that bond insurers needed to conclude deals to raise capital in five business days. Otherwise, they would be split into a municipal bond business, which would be controlled by regulators and presumably sold, and the problematic structured finance remainder would suffer downgrades and go into runoff mode.
The downgrade today of number three bond insurer FGIC by Moody’s from Aaa to A3, a full six notches was another reminder that time is running out (although the rating agency mentioned that MBIA and Ambac were in better, if still doubtful. shape).
It’s generally a mistake to tangle with a regulator, particularly when he is acting to address a genuine problem (in this case, the costly seize up of the auction rate securities market, which is subjecting municipalities to nasty unexpected costs). However, Spitzer and his deputy Eric Dinallo have no authority over Wisconsin domiciled and regulated Ambac. The biggest target for his message is MBIA, and that company has shown it is up for a fight (one illustration: it attempted to refute Pershing Square Bill Ackman’s latest missive to the regulators). If they have any legal means of blocking a breakup, expect them to try. After all, management has nothing to lose at this juncture, so even a low-odds gamble or delaying tactic would look attractive to them.
Wonder what those poor saps that bought MBIA stock in its recent offering are thinking now.
Entertainingly, Spitzer was abrasive in his Congressional testimony, getting feisty with ranking Republican, Alabama’s Spencer Bachus and bluntly telling Congress that they were too late to be helpful. Weirdly, after being rude, the New York contingent said a $10 billion line of credit from the Feds would be helpful. Go figure.
From the Wall Street Journal:
The clock is running out for bond insurers to save their triple-A credit ratings.
In congressional testimony yesterday, New York Gov. Eliot Spitzer gave a three-to-five-day time frame for the bond insurers to raise much-needed capital or find other ways to resolve their problems….
Speaking before a House Financial Services subcommittee, Mr. Spitzer effectively threatened that state regulators — namely, Eric Dinallo, the superintendent of the New York State Insurance Department — would “have to act” and potentially “strip the municipal businesses” from the bond insurers if they didn’t find a solution soon….
Most analysts agree that bond insurers will fail over the long term if they don’t carry triple-A ratings…
Mr. Spitzer, who took on Wall Street as attorney general, jostled with Republicans at the hearing and slammed the Bush administration for its oversight of the banking industry….
The brunt of Mr. Spitzer’s attack was aimed at the panel’s ranking Republican, Rep. Spencer Bachus, after the Alabaman raised questions about state regulation of banking and insurance.
“Mr. Bachus, you are involved in a fingerpointing exercise,” Mr. Spitzer said, speaking over the lawmaker. Later, Mr. Spitzer did something that almost never happens at hearings: He started aggressively asking Mr. Bachus questions. Typically, only legislators are permitted to ask questions.
During a recess, Mr. Spitzer told reporters that splitting the bond insurers’ businesses was a last resort. “The clear preference is a recapitalization of the companies,” he said. “Even if the deals don’t close, the sort of market comfort that would be needed to stabilize the marketplace could get there pretty quickly. We just have to wait and see what happens.”….
Turning up the heat yesterday on the banks’ discussions, he said in an interview that there are “some mechanisms” in the law that allow regulators to “force [the bond insurers] into what’s called ‘rehabilitation.'” During his testimony before the panel, he asked Congress for a $10 billion line of credit for the bond insurers, which he said could encourage banks to contribute capital.
Note: in case you infer that the $10 billion request came from Dinallo (the Journal’s drafting is rather artless), I checked the transcript of Dinallo’s remarks, and their is no mention of rehabilitation or a credit line, although it is possible they were mentioned in response to questions.
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Yves,
In the Q&A, Dinallo did say that a $10B credit line from the Feds would probably put the problem to rest, and if the Feds saw fit to do so that other private capital would probably participate in a recapitalization.
In response, the dopey head of the committee asked if the banks could use their access to the FHLB to fund such an investment – and noted that he would support such an effort. This was after he proposed that the Federal government insure all of the outstanding muni bonds in existence!
Watching Congress go about its business yesterday convinced me that if every American were required, once a year, to watch a congressional hearing on a topic with which they were even remotely familiar, that we would have a much smaller government. There are some truly witless people in the House. It certainly convinced me that Nancy Kaptur’s inability to distinguish Bernanke from Paulson was no fluke.
brian,
Never underestimate the stupidity of politicians from Alabama. Eeek.
I’m not saying the $10 billion line of credit is a bad idea, but one has to presume that Spitzer and Dinallo coordinated their remarks. I’m sure that what Dinallo said was sincere, but effectively the response was a request for a lot of dough, which is hard to reconcile with his boss telling the Feds to butt out (in terms of regulation).
“the response was a request for a lot of dough, which is hard to reconcile with his boss telling the Feds to butt out (in terms of regulation).”
Not hard to reconcile when one remember Spitzer, as as NY State AG, tried, in concert with a majority of his counterparts, to reign in the abuse in lending practices in 2003.
http://economistsview.typepad.com/economistsview/2008/02/state-level-pre.html
The response from the Bush Administration was truly shocking: let the greed take over everything that has to do with common sense.
No wonder Spitzer has nothing but contempt for the “federales”.
Is it 2009 yet?
Having sat in during the testimony, I can say the will was definitely there from the committee chairman, but the rest of the committee left right after the cameras were gone. The issue really isn’t understood by the group. The chairman was good. The rest were clueless. The congressman from Massachussettes did correctly idenitify insurance as “legalized extortion”, which I thought was quite touching.
francois,
I am a fan of Spitzer, even though he can be overbearing and unduly press oriented. He is a badly needed countervailing force against the fact that the deck these days is stacked in favor of corporations. I try to be a bit evenhanded in the posts because otherwise the Spitzer haters feel compelled to weigh in.
As for the testimony, fighting back to preserve Federal incursion into state regulation, which has been occurring on an ongoing basis is reasonable, particularly since in the case, the Feds have no insurance regulatory apparatus and couldn’t be helpful until too late.
It’s just the idea of even mentioning that they might stump up $10 billion (even if in the form of a loan) is odd. If they provide any funding, they are going to want to play a role. Not having heard the Q&A, it seems inconsistent with the entire thrust of the testimony. People seldom write checks without expecting some measure of influence.
nick,
Thanks for the clarification, and glad to learn Alabama has the occasional competent legislator. Having spent time there in the run-up to an elections, what you see is pretty scary.
I wouldn’t put too much emphasis on the committee members’ remarks during the hearing. Congressional hearings are done for the benefit of grandstanding before CSPAN and getting your 5-second soundbite in the evening news.
The real work is done by the staffers behind the scenes. And the staffs of the various committee members range from truly excellent to incredibly clueless…