Splitting Bond Insurers In Half-Nice Solution (ABK)(MBI)

Banking, finance, and taxes

Published: February 14, 2008 11:06 am

New York State Insurance Superintendent Eric Dinallo has come up with the lame-brained idea of taking bond insurers like MBIA (NYSE: MBI) and Ambac (NYSE: ABK) and "breaking them in half." According to MarketWatch the programs would "separating the companies’ muni-bond businesses from their more troubled structured-finance units, which have exposure to complex mortgage-related securities known as collateralized debt obligations, or CDOs."

NY governor Eliot Spitzer says the bond insurers have "three to five days" to solve their problems or he will break them up. Warren Buffett has already offered a rescue package for the muni-bond insurance operations that would re-insure $800 billion in the instruments

Mr. Dinallo clearly hasn’t thought through what happens to the portions of the bond-insurers which hold nearly-worthless CDOs and other subprime-troubled paper. Perhaps that piece of the businesses could go to the common shareholders and they could watch the Chapter 11 proceedings from the sidelines..

If NY State or any other entity wants to create a "bad bank" out of the troubled assets of the muni-insurance firms, it is going to have to take on those liabilities and suffer whatever losses they may create. The disaster was created by the mistakes made by management. The shareholders should not be left holding the check.

Douglas A. McIntyre

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