BL: MBIA, Ambac Fall as New York Says Rescue Plan Will Take Time
By Erik Holm and Shannon D. Harrington
Jan. 24 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc. fell in New York trading as the state's insurance regulator said a rescue for bond guarantors will ``take some time'' and analysts cast doubt on the agency's ability to manage the task.
``Clearly it is important to resolve issues related to the bond insurers as soon as possible,'' Insurance Superintendent Eric Dinallo said in an e-mailed statement. ``However, it must be understood that these are complicated issues involving a number of parties.'' MBIA and Ambac, the industry's two largest firms, are both based in the state.
Dinallo, who met with industry executives yesterday, is asking banks and securities firms to bolster bond insurers before their credit ratings fall. A downgrade might reduce the value of $2.4 trillion of debt the insurers guarantee, spawning losses and writedowns on top of the $133 billion already posted by the world's biggest financial firms.
Security Capital Assurance Ltd., hobbled by deterioration in its financial guarantee portfolio, lost its AAA bond insurer grade at Fitch Ratings today, throwing the rankings of at least $154.2 billion of securities in doubt. Fitch downgraded Ambac from AAA earlier this month.
MBIA fell $2.46, or 15 percent, to $14.15 in 12:37 p.m. New York Stock Exchange composite trading and Ambac dropped $1.42, or 10 percent, to $12.28, leaving both down more than 80 percent in 12 months. Security Capital, based in Bermuda, declined 90 cents to $2.89, an 89 percent loss for the past year.
Goals and Obstacles
``We believe it is important that the goals of market stability, protection for policyholders and a healthy and competitive bond insurance market be realized in the near future,'' Dinallo said in the statement. Andy Mais, a spokesman for Dinallo, said the insurance superintendent would have no further comment.
MBIA spokeswoman Elizabeth James did not immediately return a call seeking comment. While Ambac has been in touch with Dinallo's agency, the company wasn't involved in talks about the rescue, Ambac spokesman Peter Poillon said today.
``We're very interested in finding out more,'' he said.
Any rescue plan may be fraught with the same difficulties that befell Treasury Secretary Henry Paulson's attempt last year to lead a bank bailout of structured investment vehicles, said analysts including Seth Glasser at Barclays Capital Inc. Dubbed SuperSIV, the effort was ultimately dropped after banks failed to reach agreement.
New York's Role
``The New York State insurance commissioner is not the lead bank regulator, and cannot compel the banks to make large capital contributions,'' Glasser said in a note to investors today.
Dinallo will also have to persuade banks to contribute while they're still raising new funds for themselves, said analyst Steve Stelmach at Friedman, Billings, Ramsey Group Inc. in a note to investors today.
``Many investment banks have their own capital shortfalls to worry about,'' Stelmach said. Citigroup Inc. and Merrill Lynch & Co. have been selling stakes to new investors.
U.S. insurers are overseen by the states rather than federal regulators, with New York taking a lead role. Shareholders and creditors of the bond insurers aren't Dinallo's first priority, said Kathleen Shanley, an analyst with bond research firm Gimme Credit LLC in Chicago.
``The insurance department's primary mandate is to protect policyholders, not to boost the share price,'' she said yesterday.
Fresh Capital
Dinallo also needs to reach out beyond the U.S. to the rest of the world's biggest financial companies, said David Havens, an analyst at UBS AG in Stamford, Connecticut.
``Although it may be something they're trying with the best of intentions, trying to get everybody globally to agree on something would be like herding cats,'' Havens said.
If Dinallo succeeds, the insurers may get fresh capital of as much as $15 billion, the Financial Times said on its Web site yesterday. The figure may be smaller, a person familiar with the talks told Bloomberg yesterday. Dinallo may also need to act before the ratings firms downgrade bond insurers.
``While we don't have a set timeframe for a ratings review, they are typically concluded within one to three months,'' said Anthony Mirenda, a spokesman for Moody's Investors Service in New York.
Credit-default swaps tied to Ambac and MBIA rose today after plunging the most ever yesterday. A higher price reflects more investor doubt about a company's ability to pay debts.
Rising Risk
Contracts on Ambac today traded at 14 percent upfront and 5 percent a year, according to broker Phoenix Partners Group in New York. That's up from 13 percent upfront and 5 percent a year yesterday, CMA Datavision prices show. Today's level means it cost $1.4 million initially and $500,000 a year to protect $10 million in Ambac bonds from default for five years. The cost advanced to $3.2 million upfront and $500,000 a year in early trading Jan. 22.
MBIA increased to 13.5 percent upfront and 5 percent a year, from 12 percent upfront and 5 percent a year late yesterday, CMA prices show.
``Nothing we have seen so far assures us that the size or breadth of the effort is likely to help,'' Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, said of the bond insurer rescue talks in a note to clients today.
Contracts on MBIA, Ambac and other bond insurers reached record highs at the start of the week as investors rushed to hedge against the risk the companies will collapse.
Banks and securities firms including Merrill Lynch and Lehman Brothers Holdings Inc. have bought credit-default swap protection on the debt of the bond insurers to protect against losses on securities that the insurers guaranteed.
-- With reporting by Christine Richard and Elizabeth Hester in New York. Editors: Rick Green, Walid el-Gabry
To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net .
Last Updated: January 24, 2008 12:41 EST
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