New York's insurance regulator will meet sovereign wealth funds,Warren Buffett and other investors this weekend to stabilise the credit ratings on $220 billion (€150 billion) of municipal bonds guaranteed by FGIC, the troubled insurer.
FGIC, which this week lost its "triple A" credit rating, has asked the regulator to allow it to split its municipal bond business from its riskier activities, which involve guaranteeing more complex "structured" securities, some backed by payments from subprime mortgages.
By separating the "good book" of municipal guarantees from the "bad book" of guarantees on structured debt, regulators hope to stem a municipal bond crisis that is pushing up funding costs for small towns and municipal borrowers across the US.
"We will have discussions about how to deal with capitalising the good book [ of FGIC]," said Eric Dinallo, New York's insurance superintendent, who has been leading efforts to push for the recapitalisation of FGIC and its larger competitors, Ambac and MBIA. "I have a line outside my door for the good book, which includes Warren Buffett, private equity investors including Wilbur Ross and sovereign wealth funds. The good book may need recapitalisation or a backstop credit facility to remain triple A," he said.
Ambac Financial has already rejected an offer by Mr Buffett to hand over control of the company's municipal bond business. The plan would strip the bond insurers of their low-risk municipal business without solving the possible significant losses related to the structured finance side.
Eliot Spitzer said a split of FGIC could be pushed for at Ambac and MBIA if it does not stave off imminent downgrades.
It is expected to lead to losses for banks that bought insurance from FGIC on mortgage-backed securities, collateralised debt obligations and used it as a counterparty on derivatives positions. As at September 30th, FGIC insured $31 billion of mortgage-backed securities and $28 billion of CDOs. The losses suffered by banks will depend on the credit ratings of the "bad book" part of FGIC. A group of banks, including Calyon, the investment banking arm of Credit Agricole, Citigroup, UBS, Société Générale, Barclays and BNP Paribas had been discussing a potential capital injection for FGIC. The group reflects the banks most exposed to the ratings losses.
"The reactions of the banks and other institutions that are counterparties for FGIC's structured finance guarantees will be crucial in determining whether or not this plan will work," said Donald Light, senior analyst with Celent, a Boston-based financial research firm.
