Friday, February 15, 2008 3 comments ++[ CLICK TO COMMENT ]++

FGIC Splits Muni Bond Business from Their Structured Products

FGIC became the first company to split their business in two; one handling muni bonds and another for structured products. I'm not familiar with FGIC so I don't know what happens to their international operations, if they have any. (Just to clarify, they are in the process of trying to split. This may take a while.)

Dave Merkel of The Aleph Blog thinks the state can't force a split of the business:

...the state insurance commissioners lack authority to favor one class of claimants over another to the degree of setting up a “good bank/bad bank” remedy, where municipalities get preferential treatment ovr other potential claimants... The insureds that would be forced into the “bad bank” would likely not have agreed to the contract had they known that the claims-paying ability of the guarantor would be impaired.


It does seem bizarre that the regulator will favour one party over another but governments aren't necessarily efficient or know the complexities of many problems. Dave also thinks (in a subsequent post) that the state gave FGIC legal room to carry out a seperation (the lawsuits will be directed at the state more so than FGIC in the future).

As an Ambac shareholder, I would be against the split and Dave also thinks that these companies will put up a big fight:

Now this doesn’t mean that New York won’t try to split the guarantors in two; I think they will lose on Ambac because it is Wisconsin-domiciled. With MBIA, they will lose after a longer fight, because they don’t have the authority to affect the creditworthiness of contracts retroactively.


The problem with any battle with the government is that you can go bankrupt (due to lack of funds or loss of faith by customers) even if you win in the end. Legal challenges disproportionately benefit lawyers and can harm shareholders.

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3 Response to FGIC Splits Muni Bond Business from Their Structured Products

cak
February 15, 2008 at 6:38 PM

AmbacLetter

cak
February 16, 2008 at 10:49 AM

Will Ambac Split In Two?
Posted By:Lee Brodie
Topics:Stock Picks
Companies:MBIA Inc | Ambac Financial Group Inc

Financial Guaranty Insurance Corp., the third-biggest bond insurer that just lost its triple A bond rating because of subprime-related losses, plans to split into two companies, explains Erin Burnett.

The company would be split into a municipal bond insurer and a structured finance insurance company, in a ''good-bank/bad-bank'' plan that would split off the relatively safe business of insuring municipal debt from the riskier business of guaranteeing repackaged mortgages and other debt.

Will Ambac do the same?

Ambac CEO Michael Callen joins the panel. Following is a synopsis of his main points.

Will you split Ambac
in two like Financial Guaranty Insurance?

“We’re looking at that as an alternative,” says Callen, “because we have to. We have a triple A business on the municipal side. And it’s a very different business from structured finance. It’s a very different risk. So clearly one has to look at that.”

“But (the decision) will take time (to make) because you have to interact with the ratings agencies. They like the muny business; it’s always been triple A. But what do they think about the structured finance business standing on its own. That would have to play a role, here.”

What do you think of NY Governor Eliot Spitzer’s testimony before congress and his suggestion that steps must be taken within days?

“The ideas of days is all pinned on the ratings agencies,” replies Callen, "because they have been looking at their models very closely and changing them rapidly."

He adds, “If you want to maintain a triple A rating.. they could call you and say whoops you need more capital. I don’t criticize them; they’re doing their job. But Spitzer was saying in order to retain a triple A rating under the new rules, it will require additional capital.”

Will you be raising capital over the next week?

“I can’t say that,” replies Callen. “I can’t comment at this point. But we’ll see.”

February 16, 2008 at 11:54 AM

Cak what do you think of the split idea?

It all depends on the details but it makes little sense to me. The structured side not only includes subprime mortgages but also other ABS like student loans, credit card loans, auto loans, and so forth. So seperating them is going to be difficult without compensating thos insurance buyers.

As for shareholders, it's hard to say what all this means. I can see the shareholders end up with nothing; and I can see us end up with a chunk of a "spun-off" muni business (which is worth way more than the current stock price reflects) and a piece of the structured product business (the latter will go into run-off (liquidation/bankruptcy) right away I think).

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