Sunday, April 5, 2009

MBIA = AIG, Maybe Not

"Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo [ED] to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies, people familiar with the matter said. The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own, many of which have deteriorated since the onset of the credit crisis. MBIA and New York State's insurance regulator--which endorsed the restructuring--are facing a growing backlash from banks, investment funds and other policyholders. ... On Wednesday, a group of hedge funds sought class-action status for a lawsuit against MBIA and the two operating units. ... In the lawsuit, filed in a New York federal court, the funds said MBIA's restructuring 'was nothing short of a looting' of MBIA Insurance Corp., the firm's main operating unit. The funds are asking the court to reverse MBIA's plan", my emphasis, Serena Ng and Lavonne Kukendall at the WSJ, 12 March 2009.

These must be the last days. I agree with the banks. We see a fraudulent transfer in process, approved by ED. Compare MBIA's situation to AIG's, where ED approved a $20 billion bailout of the AIG parent to protect the banks. Looting indeed. ED, why did you let AIG loot its insurance subsidiaries in September?

9 comments:

Anonymous said...

Nothing like having the monolines back in the news... like the good old days. I guess this falls under willingness vs. ability to pay or reason #9 why dealing with the monolines was a terrible idea for the banks...the rest is here
http://www.acredittrader.com/?p=184

Anonymous said...

The pieces of this chess game are huge... billion dollar size...

Oh yes... "the last days"... the fighting over the remains...

ED... the bank's friend... hard to see how his actions are protecting policy holders... oh... maybe he thinks he is a "systemic" regulator...

"systemic" = maintain the status quo?

life insurance Canada said...

Does anyone knows what's the story with the Canadian AIG? I've heard they were going to separate from the US AIG. Can anyone confirm?

Take care,
Lorne

Anonymous said...

Isn't this simply applying a good bank/bad bank solution at MBAC? Municipal bonds are a viable business due to low defaults. All the other crud is not viable, so they ring fence those in a separate company. Eminently sensible to me, I fail to see why this should be called looting.

I can understand why all those banks and funds gasp in horror at this since there's a very real risk their derivatives are about to lose a lot of value. So be it, I don't have much sympathy for these geniuses.

Independent Accountant said...

Anonymous:
The reason this is looting is: the banks had contracts with MBIA. In AIG's case, the insurance subidiaries were separate entities. Like AIG, the insurance subsidiaries were looted to support the banks, the CDS counterparties.
Splitting an entity into "good and bad" parts is criminal if done in contemplation of bankruptcy. See a case I have referred to before, US v. Switzer, 252 F2d 139 (2nd. Cir., 1958). Switzer, an attorney went to prison for this. Really. I'll find the post for you. You can't "ring fence" whatever you want. Depending on the circumstances, it's a fraudulent conveyance or criminal. Really.

LIC:
I have no details on Canasian AIG.

Anonymous said...

Lorne: AIG Life of Canada is being sold to BMO Financial Group. See AIG press release

chartered accountants india said...

I’m a little late in finding this entry, but way to go! I’ll have to check out your blog.

John (with an h) said...

Anon:
I think the problem is that essentially the business decided that they'd spin off all the debt and counter-party section of the business from the money-making business.

If a business can do this, why would anyone buy a corporate bond?

I'm an individual investor who bought a mutual fund who bought MBIA bonds. If it was "obvious" that the bonds were going to be split off into a separate business that wasn't going to be able to honor them, it probably should have been mentioned when the were initially issued. I'm sure they would have been priced accordingly.

Independent Accountant said...

John:
I agree with you. This is a scam.

IA