Will Monolines be allowed to split?

[DemonD]

http://www.bloomberg.com/apps/news?p...Dmk&refer=home

FGIC Seeks Split to Salvage Municipal Debt Ratings

Feb. 15 (Bloomberg) -- FGIC Corp., the bond insurer stripped of its Aaa ranking by Moody's Investors Service yesterday, asked to be split in two to protect the ratings on municipal bonds it guarantees.

FGIC, owned by Blackstone Group LP and PMI Group Inc., applied for a license from New York state insurance regulators to create a standalone municipal company, Brian Moore, a spokesman, said. The move would separate the unit that guarantees subprime- mortgage bonds, collateralized debt obligations and the other types of financial products that led to the ratings downgrades.

Here's the thing: how can this play out? Imagine holding a CDO of one of these monolines and they are going to split the insurance... wouldn't you be fighting this, or bring a lawsuit to prevent it, or sue for the principle of the CDO? Or wouldn't these companies be forced to bring the bad deals onto their balance sheets?

The article states that these companies are seeking this idea based on Buffett's offer to buy the good stuff and leave the trash. I just don't see how this would work out (but then again I don't understand the idea of bond insurance to begin with).

[Tulpen]

Re: Will Monolines be allowed to split?

I don't see the problem, in fact I think it is an excellent solution.

Consequence of course is that the new company with the bad CDO's is more likely to fail.

What this country needs now is not a Buffett but an American version of Lloyd's of London. Any billionairs out there who are willing to risk their personal wealth for a fancy return? ;)

[DemonD]

Re: Will Monolines be allowed to split?

Tul, here's the problem as I see it (and here I go again using a functional metaphor):

Let's say I buy an auto insurance policy from company XYZ. They also sell home insurance. Now let's say 80 gazillion people all have car accidents, but very few homes burn down. Now Company XYZ wants to split off their home and car insurance businesses, and they do so. Now let's say I have a car accident - but oops! I can't get paid, or I can only be paid on 25% of my policy because of all the other defaults. Well, screw that, I'm going to sue the company for breech of contract and go after the home insurance side of the business, and likely there will be many others like me, and we'll join in a class action suit.

I just don't see how the policyholders of the CDO's can possibly just let this happen without a huge fight, and they will make it impossible for deals like this to get done.

Thoughts, itulipers?

[orednes]

Re: Will Monolines be allowed to split?

I think they will, based on the "greater good" theory. The gov't entities involved are not going to stand in the way, because of the disastrous results to the muni markets if they don't split.

IMHO

[Tulpen]

Re: Will Monolines be allowed to split?

I just don't see how the policyholders of the CDO's can possibly just let this happen without a huge fight, and they will make it impossible for deals like this to get done.

LOL

Oh they will fight but they have to fight the government, and we all know who is going to win right?