befuddled: what non-muni business does MBIA plan to have?
I am a bit of a loss to understand how all these proposals to split the monolines, to seperate the plain-vanilla bond insurance operations from the derivative side would work.
Just what derivative insurance business is there to save? From what I hear there have been only a couple CDOs created for 2008, and hardly any new issues came out in the last few months. These guys can't really believe there is going to be significant interest in CDO investments over the foreseeable future (say 5 years) do they?
There can't be any measurable recovery of the derivative securities markets until all the toxic products that are currently in a state of flux are fully written off, or reached valuations that all market participants can agree on. As long as rating downgraded keep dribbling out every week this isn't going to happen.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7kNcEz7fUAI&refer=home
Just what derivative insurance business is there to save? From what I hear there have been only a couple CDOs created for 2008, and hardly any new issues came out in the last few months. These guys can't really believe there is going to be significant interest in CDO investments over the foreseeable future (say 5 years) do they?
There can't be any measurable recovery of the derivative securities markets until all the toxic products that are currently in a state of flux are fully written off, or reached valuations that all market participants can agree on. As long as rating downgraded keep dribbling out every week this isn't going to happen.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7kNcEz7fUAI&refer=home
Comments
Perhaps a split up isn't a totally voluntary option
NY regulator: Bond insurers may be split up
NEW YORK/WASHINGTON (Reuters) -New York insurance regulator Eric Dinallo, who is heading up efforts to rescue bond insurers, is set to testify that he will consider allowing the companies to split their relatively strong municipal bond guarantee businesses off from the problem parts of their businesses.
According to prepared testimony obtained by Reuters, New York Insurance Superintendent Dinallo prefers to protect all parts of the bond insurers' business, but if it becomes clear that is not possible, his first priority is to protect municipal bond issuers and investors......
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I've heard about this plan to split upt he monolines, but it still just doesn't make any sense. There just isn't anything other than the plain bond insurance business left.
Further, the CDO insurance offerings relied on the revenue streams from the bond insurance. There is no way to seperate out the bond and CDO insurance products since there that would be violating the conditions of the CDO insurance contracts.
It's as if State Farm were to suddenly announce that they were seperating the pool of Florida home-owners from those in other states, ensuring that the losses from future Florida disasters could never exceed the revenue from that state alone. If State Farm were to do such a thing, they would be sued instantly for violating the terms of their existing Florida insurance contracts. What's more, State Farm would most definitely lose in court.
Good summary article IMHO. Monoline split-up appears to be far from a done deal ---
Monoline bond insurers
.......Ambac is reportedly considering a plan to split its operations into two subsidiaries, one responsible for securities including mortgage-backed CDOs, and another for municipal bonds. This split into two "houses" of Ambac would allow the municipal bonds side of the house to keep its high credit rating while thrusting the massive debt problems related to subprime lending onto the other half of the business. FGIC has already told the state of New York that it needs a similar split. Investment banks that have bought insurance on mortgage-related securities through Ambac and FGIC will use the court system to oppose this business practice, as they are concerned such a move would leave their insurance contracts suddenly backed by smaller, less financially stable companies that will not have AAA credit ratings. MBIA, meanwhile, opposes the concept and has raised doubts that such a split can be legal. As the largest of the three insurers it is best equipped to survive the current crisis without halving itself, and it has already raised over $2.5 billion to cover its debts and regain stability...........
I thought that was the point. You've got good loans (municipals) and bad loans. So rather than destroy municipalities, you break that off into a still functioning business. The other half fails. Kind of like cutting off a gangrenous limb.
It's more like trying to cut off a gangrenous head to protect the rest of your body. Not only is the CDO insurance business dead (for all intents and purposes) but there is no way to legally extricate the existing monoline CDO liabilities from the plain-vanilla bond insurance revenue stream.
The CDO insurance was underwritten using the entire pool of the monoline portfolios (which included the bond insurance revenue streams) as collateral. The minute the monolines actually try to seperate the munis from the CDOs they will be sued so fast by the CDO holders that their heads will spin!
Worse, the monolines would lose any lawsuits brought against them for splitting their businesses, since they would clearly be in the wrong. They can't just arbitrarily come out and limit their liability to CDOs retroactively.
This idea of splitting the monolines is insane on so many levels...
About the only thing the monolines could do is setup a new business exclusively for non CDO insurance, and raise fresh capital for it. Thus any NEW insurance business wouldn't be hostage to their CDO liabilities. But they couldn't siphon off EXISTING bond insurance revenue streams into some seperate entity. It just won't be possible.
But even with this strategy, what you would be doing is pretty much just declaring bankruptcy on your existing business, and starting a completely new one. The existing shareholders would lose everything anyway. If you really wanted to start a new bond insurer, then why not just do it clean from the start, with a completely new company with absolutely NO ties to the old monolines? If I was an investor being asked to stump up capital I would much prefer to be working with a completely new company that had absolutely no taint with the older monolines, not some hived off legally seperated entity.
Wow! I did not think MBIA would split.
MBIA Will Halt Asset-Backed Business, Split Units
MBIA Inc., seeking to stave off a crippling credit rating downgrade, will stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years....
This whole thing is just an orchestrated delaying tactic
Name for me even one of these major moves in the news which aren't. Really, I would like to know if anything our leaders are doing is more than a glorified timeout.