Thursday, January 24, 2008

A Good Reason To Love New York (ABK; MBI)

UPDATE below.
Unless you're short of greedy idiots, then it's a nightmare.
From 1440 Wall Street:

This market is completely nuts, and a rather unlikely savior for both Wall Street and Main Street is emerging in the form of New York's insurance regulators:

Talks in New York with the unnamed banks are part of Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, said agency spokesman Andrew Mais in an interview.

New capital may help preserve the top credit ratings for the bond guarantors such as MBIA Inc., the industry's largest, and halt any erosion of investor confidence in the $2 trillion of assets they guarantee. Ambac Financial Group Inc., MBIA's biggest rival, lost its AAA grade from Fitch Ratings this month on concern about rising defaults tied to subprime mortgages.

And this quote might be the biggest understatement of the new year:...MORE

And from Naked Capitalism:
Worrisome Signs for the Bond Insurer Bailout

I hate to be a nay-sayer, and I want to make it clear that it really would be for the best if New York State insurance superintendent Eric Dinallo could pull off a rescue of the troubled bond insurers. But as we pointed out, this is an uphill battle under the best of circumstances, and the initial tidbits dribbling out in the media from the discussions are not encouraging.

Before we get to the news items, let's go through a list of what makes this difficult:

1. Lack of a template. The closest parallel was the wind-down of Long Term Capital Management, in which 24 firms stumped up cash which served to shore up the firm. In LTCM's case, the exposures were known, the damage could be estimated with reasonable certainty, and the liquidation horizon wasn't that long. By contrast, here there are more institutions, both the insurers and the parties potentially at risk, more uncertainty as to total liability and how it might play out over time, and a longer time frame for liquidation, assuming the insurers are put in run-off mode....MORE