Clearly, this monoline-bond-wrapper-insurance thingy is trickier that the good Superintendent realised. Here’s a statement from Eric Dinallo, the New York State Insurance Super, issued on Thursday:
Clearly it is important to resolve issues related to the bond insurers as soon as possible. However, it must be understood that these are complicated issues involving a number of parties and any effective plan will take some time to finalize. In the meantime, we will not respond to the inevitable rumors. 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.
That’s it - and we are not even allowed to asked further questions!
Maybe these comments from BarCap credit analyst Manish Bakhda, sent to clients on Thursday morning, bear repetition:
According to our US insurance analysts (Seth Glasser/Joseph Lesko), the market may have gotten ahead of itself with the major rally that took place yesterday afternoon once the bailout story hit the news.
First, the NYS insurance commissioner is not the lead bank regulator, and cannot compel the banks to make large capital contributions to the monolines. We do not know yet if the Fed is working in unison with the commissioner, however even if that is the case, the Fed will need to be more concerned with the safety and soundness of the banking system, with the impact of the current crisis on monolines a secondary consideration. This could mean that pressure severe enough to force action might never develop.
Second, we believe that it could be very hard for the bank group to agree on a breakdown for contributions. Similar to the super-SIV proposal that ultimately fell apart, banks and dealers have different sizes of monoline exposures, and different counterparty distribution, potentially making some supportive, and others dismissive, of any plan that might near completion.
The bottom line is that we view any potential bailout of the monolines as being in the very early innings, and feel it is by no means a certainty. We believe the market should realize that more detail is needed before a rally akin to yesterday’s is really justified.
Furthermore, we make the important point that insurance regulators exist to protect the interests of policyholders, so while any capital contributions could be positive for the AAA operating companies, they could have a less favorable impact on the AA holding company level credit profiles. This would very much depend on how any ultimate plan is structured, and whether the regulator continues to permit the regulated insurance entity to support the unregulated holding company.
For more reading, the Goode Value Investing blog has put up a letter from Bill Ackman, noted short-seller of the bond insurers, to Moody’s, S&P and Fitch.
