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BAILOUT? - New York Insurance Superintendent watching bond insurers, may intervene
- Thread starter Cdntrader
- Start date
``While we are doing all that we can to protect all policy holders and strengthen the bond insurers, our first priority will be to protect the municipal bondholders and issuers,'' Dinallo said. ``We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.''
``It has become clear that the loss of the AAA rating essentially cripples the company's ability to do business as a going concern,'' Dinallo's testimony said.
That also casts doubt on the reliance solely on ratings as a method of measuring risk, he said. Total dependence ``is not prudent,'' Dinallo said. ``Rather, an independent analysis by regulators of risk positions'' may be more appropriate.''
MBIA Chief Financial Officer Charles Chaplin dismissed suggestions that the industry needs a rescue or stronger federal oversight, according to his prepared remarks.
``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' Chaplin said.
``It has become clear that the loss of the AAA rating essentially cripples the company's ability to do business as a going concern,'' Dinallo's testimony said.
That also casts doubt on the reliance solely on ratings as a method of measuring risk, he said. Total dependence ``is not prudent,'' Dinallo said. ``Rather, an independent analysis by regulators of risk positions'' may be more appropriate.''
MBIA Chief Financial Officer Charles Chaplin dismissed suggestions that the industry needs a rescue or stronger federal oversight, according to his prepared remarks.
``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' Chaplin said.
Bond insurers have days to re-capitalize, Spitzer says
By Alistair Barr
Last update: 12:32 p.m. EST Feb. 14, 2008Print RSS Disable Live Quotes
SAN FRANCISCO (MarketWatch) -- Bond insurers have four to five business days to re-capitalize themselves enough to keep their crucial AAA credit ratings, New York Governor Eliot Spitzer said during a Congressional hearing on the $2.4 trillion industry on Thursday. If that doesn't happen, regulators will have to step in and separate bond insurers' municipal businesses from their more troubled structured finance units. "We will need to move in that direction. It is not our first choice but time is short," Spitzer said. "In the next for or five bus days we would like to see a resolution," Spitzer added. "It's time for deals to get done."
By Alistair Barr
Last update: 12:32 p.m. EST Feb. 14, 2008Print RSS Disable Live Quotes
SAN FRANCISCO (MarketWatch) -- Bond insurers have four to five business days to re-capitalize themselves enough to keep their crucial AAA credit ratings, New York Governor Eliot Spitzer said during a Congressional hearing on the $2.4 trillion industry on Thursday. If that doesn't happen, regulators will have to step in and separate bond insurers' municipal businesses from their more troubled structured finance units. "We will need to move in that direction. It is not our first choice but time is short," Spitzer said. "In the next for or five bus days we would like to see a resolution," Spitzer added. "It's time for deals to get done."
Transcript: Eric Dinallo
Published: February 14 2008 15:39 | Last updated: February 14 2008 15:39
Testimony of the New York State Insurance Department Before the Committee on Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, United States House of Representatives
Regarding: Bond Insurance
February 14, 2008
Eric Dinallo
Superintendent of Insurance
New York
âI would like to thank Chairman Kanjorski, Ranking Member Pryce and the other members of the Capital Markets Subcommittee of the House Financial Services Committee for allowing me to testify today.
âMy name is Eric Dinallo and I am New York State Insurance Superintendent.
âYou have already heard Governor Spitzer discuss the broader issues around bond insurance. Last week I provided a letter that gave detailed answers to some important questions from you office, which I trust was helpful. Now, I would like to review what the New York State Insurance Department has done and is doing. As the primary regulator of this industry, we have a unique perspective.
âAs insurance regulators, it is our responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. In the case of bond insurance, there are two main groups of policyholders. There are the municipal governments who bought insurance for the bonds they issued and by extension the investors who bought those bonds. Then there are the banks and investment banks who bought insurance for the structured securities, including mortgage-backed securities.
âThe best way to protect all the policyholders is to preserve the triple-A ratings of some of the bond insurers. So we have been attempting to facilitate additions to the capital strength of the bond insurers, not for their own sake, but to protect first policyholders and second the markets and broader economy.
âThis is an extraordinarily difficult problem. Every single bond insurer is in a different situation with different strengths and weaknesses. They each have a different group of investors and owners, who have different views. They each must deal with a different set of counterparties; that is banks, broker dealers and investment banks, each of which has a different level of exposure. And there are different potential outside investors with differing types of offers.
âAbsent a government bailout, which is not planned, it is up to each of these insurers and their counterparties to come to an agreement. This is difficult for some obvious reasons. There are billions of dollars at stake. And there is no agreement on, and indeed no way to know with certainty, just how big the losses from the subprime market will be.
âThat said, we are working hard with all parties to reach agreements.
âThis is part of our three-point plan, which, as publicly stated first on January 9th, is:
âFirst, bring in new capital and capacity. We invited Berkshire Hathaway to open a new bond insurer in New York, licensed it in record time and worked with the NAIC to help the company get licenses in all 50 states. In November the Insurance Department approved a $1.5 billion capital infusion into CIFG. We approved MBIAâs capital raising plan in record time. Just last week MBIA raised $1 billion in an oversubscribed public offering. The company has now added a total of $2.5 billion in capital in the last two months.
âSecond, we are seeking a broader solution by working with all parties, the insurers, banks, financial advisors, private equity investors, rating agencies and federal officials. At the moment, that means facilitating efforts to strengthen each individual bond insurer, while also including plans to deal with possibly chronically distressed companies.
âThird, we are working on rewriting the regulations for bond insurance to prevent companies from taking on inappropriate risk in the future, while not discouraging the financial creativity that is essential to maintaining our position as the world financial capital. As part of this effort, we continue to discuss many issues with a wide variety of interested parties, and we have already made significant progress toward new regulations that will govern this industry going forward.
âWhile we are doing all that we can to protect all policy holders and strengthen the bond insurers, if it becomes clear that is not possible, our first priority will be to protect the municipal bondholders and issuers. We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.
âWe have been actively discussing all of the options with the bond insurers and, if necessary, we will consider allowing the bond insurers to split themselves into two companies. One would have the municipal bond policies and any other healthy parts of the business. And there is no reason to believe that this cannot be a healthy business. The other would have the structured finance and problem parts of the business.
âWe would ensure that the funds paid by municipal governments would go to support their insurance, and not pay for the problems in structured finance. We believe that this plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds.
âIt was to ensure a safety net for the municipal bonds that over the Martin Luther King Day weekend in January we asked Berkshire Hathaway to price the entire municipal bond portfolio of the three largest bond insurers. Earlier this month, Berkshire sent its proposal to the three companies. I believe that there may be other investors who would be interested in investing in the municipal side of the business.
âIn the course of my testimony so far I have made two assumptions I ought to stop and address.
âFirst, I have been assuming that credit ratings will continue to play an important part in the financial markets. There has been much criticism of the performance of the rating agencies and it is otherâs responsibility to oversee rating agencies and determine what reforms are needed. But we cannot forget that they play an essential role, if they are doing their job properly, of providing information that makes markets more efficient. Itâs not practical for every investor to fully vet every issuer of every stock and bond. The issue now is how to ensure that rating information is accurate, credible and that conflicts are managed properly.
âSecond, the Insurance Department is working to maintain a healthy competitive market in bond insurance because it is our job to make sure there is a market for the insurance that individuals, companies and governments want and need. Now, some muni issuers have decided they no longer need insurance and there are questions about the accuracy of municipal bond ratings.
âTime and the market will determine the how much municipal bond insurance is needed. An AAA rating gives municipal bonds the broadest possible distribution among investors. There is more demand for top-rated AAA securities than supply. Again, it is difficult for investors to fully vet the many small public sector issuers. It is likely that a substantial number of government issuers will want the reduced cost of borrowing that a higher rating produces. Project finance, with its one-time or relatively short-lived issuers, is another area where bond insurance makes sense. We have invited in new companies and will work to make sure bond insurance is available to the government issuers that need it.
âAs to the future, we have just begun to study how to improve regulation in this area. Our main focus is on the need for immediate action to limit the damage. However, we can offer some broad comments now, with the understanding that we expect to develop more specific proposals soon.
âThe primary goal of insurance regulation with respect to financial oversight is to ensure that the insurer maintains an adequate level of solvency and is able to honour policyholdersâ claims. The business model for the financial guaranty insurance companies, however, requires that they hold levels of capital that will allow them to maintain the AAA rating necessary to write new business.
âIt has become clear that the loss of the AAA rating essentially cripples the companyâs ability to do business as a going concern and puts the insurer in a ârun-offâ mode. We now are considering whether the sustainability of the business model should be the regulatory standard going forward. While we of course consider claims paying ability as the benchmark, our goal for the future, for all insurers, is to do higher level risk-based examinations.
âFinancial guaranty insurance is a complicated business, which is largely based on modelling and underwriting of complex capital market instruments. Total reliance on the rating agencies is not prudent. Rather an independent analysis by regulators of risk positions by FGIs could be more appropriate. It would also require greater transparency between the bond insurers and their regulator, by which I mean, more information and oversight regarding the nature of the risks being insured.
âWithin the current regulatory framework, other steps can be taken to restrict the FGIsâ financial leverage to better protect their solvency, and to restrict activities around products that may be too volatile going forward; for example, guaranties of the CDO squared transactions.
âWe welcome any suggestions about how to improve our regulations.
âI welcome your questions.â
Published: February 14 2008 15:39 | Last updated: February 14 2008 15:39
Testimony of the New York State Insurance Department Before the Committee on Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, United States House of Representatives
Regarding: Bond Insurance
February 14, 2008
Eric Dinallo
Superintendent of Insurance
New York
âI would like to thank Chairman Kanjorski, Ranking Member Pryce and the other members of the Capital Markets Subcommittee of the House Financial Services Committee for allowing me to testify today.
âMy name is Eric Dinallo and I am New York State Insurance Superintendent.
âYou have already heard Governor Spitzer discuss the broader issues around bond insurance. Last week I provided a letter that gave detailed answers to some important questions from you office, which I trust was helpful. Now, I would like to review what the New York State Insurance Department has done and is doing. As the primary regulator of this industry, we have a unique perspective.
âAs insurance regulators, it is our responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. In the case of bond insurance, there are two main groups of policyholders. There are the municipal governments who bought insurance for the bonds they issued and by extension the investors who bought those bonds. Then there are the banks and investment banks who bought insurance for the structured securities, including mortgage-backed securities.
âThe best way to protect all the policyholders is to preserve the triple-A ratings of some of the bond insurers. So we have been attempting to facilitate additions to the capital strength of the bond insurers, not for their own sake, but to protect first policyholders and second the markets and broader economy.
âThis is an extraordinarily difficult problem. Every single bond insurer is in a different situation with different strengths and weaknesses. They each have a different group of investors and owners, who have different views. They each must deal with a different set of counterparties; that is banks, broker dealers and investment banks, each of which has a different level of exposure. And there are different potential outside investors with differing types of offers.
âAbsent a government bailout, which is not planned, it is up to each of these insurers and their counterparties to come to an agreement. This is difficult for some obvious reasons. There are billions of dollars at stake. And there is no agreement on, and indeed no way to know with certainty, just how big the losses from the subprime market will be.
âThat said, we are working hard with all parties to reach agreements.
âThis is part of our three-point plan, which, as publicly stated first on January 9th, is:
âFirst, bring in new capital and capacity. We invited Berkshire Hathaway to open a new bond insurer in New York, licensed it in record time and worked with the NAIC to help the company get licenses in all 50 states. In November the Insurance Department approved a $1.5 billion capital infusion into CIFG. We approved MBIAâs capital raising plan in record time. Just last week MBIA raised $1 billion in an oversubscribed public offering. The company has now added a total of $2.5 billion in capital in the last two months.
âSecond, we are seeking a broader solution by working with all parties, the insurers, banks, financial advisors, private equity investors, rating agencies and federal officials. At the moment, that means facilitating efforts to strengthen each individual bond insurer, while also including plans to deal with possibly chronically distressed companies.
âThird, we are working on rewriting the regulations for bond insurance to prevent companies from taking on inappropriate risk in the future, while not discouraging the financial creativity that is essential to maintaining our position as the world financial capital. As part of this effort, we continue to discuss many issues with a wide variety of interested parties, and we have already made significant progress toward new regulations that will govern this industry going forward.
âWhile we are doing all that we can to protect all policy holders and strengthen the bond insurers, if it becomes clear that is not possible, our first priority will be to protect the municipal bondholders and issuers. We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects.
âWe have been actively discussing all of the options with the bond insurers and, if necessary, we will consider allowing the bond insurers to split themselves into two companies. One would have the municipal bond policies and any other healthy parts of the business. And there is no reason to believe that this cannot be a healthy business. The other would have the structured finance and problem parts of the business.
âWe would ensure that the funds paid by municipal governments would go to support their insurance, and not pay for the problems in structured finance. We believe that this plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds.
âIt was to ensure a safety net for the municipal bonds that over the Martin Luther King Day weekend in January we asked Berkshire Hathaway to price the entire municipal bond portfolio of the three largest bond insurers. Earlier this month, Berkshire sent its proposal to the three companies. I believe that there may be other investors who would be interested in investing in the municipal side of the business.
âIn the course of my testimony so far I have made two assumptions I ought to stop and address.
âFirst, I have been assuming that credit ratings will continue to play an important part in the financial markets. There has been much criticism of the performance of the rating agencies and it is otherâs responsibility to oversee rating agencies and determine what reforms are needed. But we cannot forget that they play an essential role, if they are doing their job properly, of providing information that makes markets more efficient. Itâs not practical for every investor to fully vet every issuer of every stock and bond. The issue now is how to ensure that rating information is accurate, credible and that conflicts are managed properly.
âSecond, the Insurance Department is working to maintain a healthy competitive market in bond insurance because it is our job to make sure there is a market for the insurance that individuals, companies and governments want and need. Now, some muni issuers have decided they no longer need insurance and there are questions about the accuracy of municipal bond ratings.
âTime and the market will determine the how much municipal bond insurance is needed. An AAA rating gives municipal bonds the broadest possible distribution among investors. There is more demand for top-rated AAA securities than supply. Again, it is difficult for investors to fully vet the many small public sector issuers. It is likely that a substantial number of government issuers will want the reduced cost of borrowing that a higher rating produces. Project finance, with its one-time or relatively short-lived issuers, is another area where bond insurance makes sense. We have invited in new companies and will work to make sure bond insurance is available to the government issuers that need it.
âAs to the future, we have just begun to study how to improve regulation in this area. Our main focus is on the need for immediate action to limit the damage. However, we can offer some broad comments now, with the understanding that we expect to develop more specific proposals soon.
âThe primary goal of insurance regulation with respect to financial oversight is to ensure that the insurer maintains an adequate level of solvency and is able to honour policyholdersâ claims. The business model for the financial guaranty insurance companies, however, requires that they hold levels of capital that will allow them to maintain the AAA rating necessary to write new business.
âIt has become clear that the loss of the AAA rating essentially cripples the companyâs ability to do business as a going concern and puts the insurer in a ârun-offâ mode. We now are considering whether the sustainability of the business model should be the regulatory standard going forward. While we of course consider claims paying ability as the benchmark, our goal for the future, for all insurers, is to do higher level risk-based examinations.
âFinancial guaranty insurance is a complicated business, which is largely based on modelling and underwriting of complex capital market instruments. Total reliance on the rating agencies is not prudent. Rather an independent analysis by regulators of risk positions by FGIs could be more appropriate. It would also require greater transparency between the bond insurers and their regulator, by which I mean, more information and oversight regarding the nature of the risks being insured.
âWithin the current regulatory framework, other steps can be taken to restrict the FGIsâ financial leverage to better protect their solvency, and to restrict activities around products that may be too volatile going forward; for example, guaranties of the CDO squared transactions.
âWe welcome any suggestions about how to improve our regulations.
âI welcome your questions.â
I'm thinking of buying more puts on this companies after seeing dinallo being so firm , willing to attack mbia and compliment the short sellers.
heres ackman SEC filling of his put position.
http://www.sec.gov/Archives/edgar/data/1336528/000117266108000167/pscm4q07.txt
is there any way to know what is the specific options and expirity dates of these positions?cusip number is just reflecting abk and mbi common shares
Im trying to decide which puts are better, I cant be sure these stocks are doing to $0 but with puts the payoff odds are so good I think its a slam dunk to give it a shot
heres ackman SEC filling of his put position.
http://www.sec.gov/Archives/edgar/data/1336528/000117266108000167/pscm4q07.txt
is there any way to know what is the specific options and expirity dates of these positions?cusip number is just reflecting abk and mbi common shares
Im trying to decide which puts are better, I cant be sure these stocks are doing to $0 but with puts the payoff odds are so good I think its a slam dunk to give it a shot
Bank Risk Soars on Concern Bond Insurer Breakup May Fuel Losses
By Abigail Moses
Feb. 15 (Bloomberg) -- The cost of protecting banks from default soared on concern a proposal to break up bond insurers MBIA Inc. and Ambac Financial Group Inc. may trigger further credit market losses.
Credit-default swaps on the Markit iTraxx Financial index of 125 banks and financial institutions jumped 6 basis points to 100 at 11:45 a.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Japan index rose 4 basis points to 86, Morgan Stanley prices show.
New York Insurance Department Superintendent Eric Dinallo said regulators are trying to help the two biggest bond insurers raise $15 billion to avert rating downgrades that may endanger the $1.2 trillion of debt they guarantee worldwide. One option is to split the insurers' municipal bond business from their money-losing subprime-mortgage units, Dinallo said in a Bloomberg Television interview yesterday.
``A forced breakup along the good business, bad business lines wouldn't be good for banks,'' said Nigel Myer, a research analyst at Dresdner Kleinwort in London. ``Removing the solid cash flows from the municipal bonds would leave the rump rather naked and potentially much less able to meet its obligations.''
Credit-default swaps on Zurich-based UBS AG, Europe's second-biggest bank by assets, rose 3 basis points to 95, according to CMA Datavision. UBS posted the biggest-ever loss by a bank this week, writing down $13.7 billion on securities infected by U.S. subprime mortgages including $871 million on credit protection purchased from bond insurers.
A basis point on a credit-default swap contract protecting 10 million euros ($14.6 million) of debt from default for five years is equivalent to 1,000 euros a year.
Deutsche Bank
Contracts on Frankfurt-based Deutsche Bank AG, Germany's biggest bank, rose 5 basis points to 85 and Credit Suisse Group, Switzerland's second-biggest bank, rose 4 basis points to 92, CMA prices show.
``The stakes have been raised for the banks,'' Royal Bank of Scotland Group Plc analysts led by Michael Cox said in a note to investors today. The threat of an MBIA and Ambac breakup is a ``severe negative'' for bonds and credit-default swaps guaranteed by the companies, the report said.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
Rescue Deadline
Dinallo may have less than two weeks to find a solution. Moody's Investors Service said it plans to complete its review of Armonk, New York-based MBIA and Ambac of New York by the end of the month.
FGIC Corp., the fourth-biggest bond insurer, lost its Aaa rating at Moody's yesterday. The company is in worse financial shape than larger competitors MBIA and Ambac, the ratings firm said. The insurance units of New York-based FGIC were cut six levels to A3 and may be reduced again, Moody's said.
The benchmark Markit iTraxx Crossover Index of credit- default swaps on 50 companies with mostly high-risk, high-yield credit ratings rose 24 basis points to 565 today, according to JPMorgan.
Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 6 basis points to 108.5, Deutsche Bank prices show.
The CDX North America Investment Grade Index rose 2.25 basis points to 140.25 at the close of trading in New York, according to Deutsche Bank.
By Abigail Moses
Feb. 15 (Bloomberg) -- The cost of protecting banks from default soared on concern a proposal to break up bond insurers MBIA Inc. and Ambac Financial Group Inc. may trigger further credit market losses.
Credit-default swaps on the Markit iTraxx Financial index of 125 banks and financial institutions jumped 6 basis points to 100 at 11:45 a.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Japan index rose 4 basis points to 86, Morgan Stanley prices show.
New York Insurance Department Superintendent Eric Dinallo said regulators are trying to help the two biggest bond insurers raise $15 billion to avert rating downgrades that may endanger the $1.2 trillion of debt they guarantee worldwide. One option is to split the insurers' municipal bond business from their money-losing subprime-mortgage units, Dinallo said in a Bloomberg Television interview yesterday.
``A forced breakup along the good business, bad business lines wouldn't be good for banks,'' said Nigel Myer, a research analyst at Dresdner Kleinwort in London. ``Removing the solid cash flows from the municipal bonds would leave the rump rather naked and potentially much less able to meet its obligations.''
Credit-default swaps on Zurich-based UBS AG, Europe's second-biggest bank by assets, rose 3 basis points to 95, according to CMA Datavision. UBS posted the biggest-ever loss by a bank this week, writing down $13.7 billion on securities infected by U.S. subprime mortgages including $871 million on credit protection purchased from bond insurers.
A basis point on a credit-default swap contract protecting 10 million euros ($14.6 million) of debt from default for five years is equivalent to 1,000 euros a year.
Deutsche Bank
Contracts on Frankfurt-based Deutsche Bank AG, Germany's biggest bank, rose 5 basis points to 85 and Credit Suisse Group, Switzerland's second-biggest bank, rose 4 basis points to 92, CMA prices show.
``The stakes have been raised for the banks,'' Royal Bank of Scotland Group Plc analysts led by Michael Cox said in a note to investors today. The threat of an MBIA and Ambac breakup is a ``severe negative'' for bonds and credit-default swaps guaranteed by the companies, the report said.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
Rescue Deadline
Dinallo may have less than two weeks to find a solution. Moody's Investors Service said it plans to complete its review of Armonk, New York-based MBIA and Ambac of New York by the end of the month.
FGIC Corp., the fourth-biggest bond insurer, lost its Aaa rating at Moody's yesterday. The company is in worse financial shape than larger competitors MBIA and Ambac, the ratings firm said. The insurance units of New York-based FGIC were cut six levels to A3 and may be reduced again, Moody's said.
The benchmark Markit iTraxx Crossover Index of credit- default swaps on 50 companies with mostly high-risk, high-yield credit ratings rose 24 basis points to 565 today, according to JPMorgan.
Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 6 basis points to 108.5, Deutsche Bank prices show.
The CDX North America Investment Grade Index rose 2.25 basis points to 140.25 at the close of trading in New York, according to Deutsche Bank.