Wednesday, February 18, 2009 0 comments ++[ CLICK TO COMMENT ]++

NY Insurance superintendent Eric Dinallo talks about the MBIA split

Here are a couple of videos of Eric Dinallo, the regulator of insurance companies, talking about the MBIA split (there is also a bit about AIG in the Bloomberg interview.)

Bloomberg interview
CNBC interview

Eric Dinallo says that he is a fan of the 'good bank, bad bank' solution, which is sort of how the MBIA split is structured. Any sort of split seemed impossible for legal reasons an year ago but it is likely that there won't be any legal challenges. I suspect that the banks and other buyers of insurance had wrote off most of the losses on subprime mortgage bonds, not to mention being almost nationalized, and hence have less of a reason to put up a fight. The key benefit of this separation, as Dinallo points out, is that the public finance side will have an easier time attracting capital.

I haven't looked at the numbers but roughly speaking it seems that MBIA's public finance company will have around $5 billion of capital insuring around $500 billion of bonds, which gives it a leverage of 100x (Berkshire Hathaway Assurance Corporation was initially capitalized with a leverage around that figure if I remember so I would deem it reasonable--however AFAIK BHAC hasn't insured any new bonds (has only re-insured existing insurance.)) The structured side is supposed to insure $250 billion of structured finance bonds with around $9 billion if I'm not mistaken. That's a leverage of around 28x and it remains to be seen if this is enough to absorb the losses.

On top of the usual subprime CDO and HELOC/CES issues, a big risk for MBIA is losses from commercial real estate. Since commerical real estate only seems to have started correcting lately, the potential downside is not clear.

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