Eliot Spitzer is doing what he does best--threatening regulatory interventions of dubious legality, in order to strongarm banks into donating money to his pet causes. In this case, that cause is the municipal bond authorities of New York State. Nicole Gelinas of the Manhattan Institute points out the problem with this:
State and local leaders across the country (and investors in their muni bonds) complain that they're being punished for something that's not their fault. Yes, there's always a risk to issuing bonds whose interest rates "reset" frequently - but one can hardly blame municipalities for not foreseeing this strange situation.
Spitzer and his insurance regulator, Eric Dinallo, think they have a solution. If big banks don't immediately pump billions into the bond insurers to make the market happy (or if the insurers don't capitulate to billionaire Warren Buffett's offer to simply buy out their muni-bond insurance business at a dear price), Spitzer and Dinallo say, they'll use their regulatory powers to let the insurers break up - that is, split their business in two, with "good" muni bonds in one company and "bad" mortgage bonds in the other.
But there are a few problems with that.
First, the state has a conflict of interest. It's a regulator, but also stands to lose money as an issuer of insured muni bonds. New York and its authorities have nearly a fifth of their outstanding debt in about $4 billion of "insured" bonds whose interest rates reset frequently - all of which could face millions in higher rates in even short-term turmoil.
So splitting the bond insurers into "good" and "bad" firms may make investors wonder if the state is thinking of itself, rather than thinking of all insurance clients as a regulator should. And some investors will likely sue.
After all, it's unlikely that the "bad" insurance company would survive after a split. That is, the firm that gets the mortgage bonds won't be able to pay out on its claims. People and institutions that bought subprime mortgages only because they, like muni bonds, came guaranteed with a AAA rating, will lose.
As an AIG employee, I'm still convinced Hank Greenberg will order him killed on his deathbed. It probably won't happen for another couple decades yet though, that black-hearted bastard will outlive us all out of spite
who, really, are these individuals, invested with fiduciary responsibility, that actually made the decision(s) to issue ARS liabilities to raise funding?
this: "Yes, there's always a risk to issuing bonds whose interest rates "reset" frequently - but one can hardly blame municipalities for not foreseeing this strange situation."--MM
is a pathetic excusing of those that should be made widely known for their decisions..they should be blamed for not excising as much Risk as possible..
sorry, seems that what I attributed to MM, was from this: Nicole Gelinas of the Manhattan Institute / paid shill
As one of the business columnists in the WSJ put it, Spitzer's plan to split the monoline insurance companies into good compaies that insure the munies and bad companies that insure the crappy structured credits is likely to lead to the mother of all fraudulent conveyance lawsuits. As a lawyer, I don't see any way to compel the holders of the insurance policies on structured deals to accept that kind of cramdown outside of insurance insolvency proceedings.
To MEH:
Yes, the states incurred risk by issuing variable-rate bonds. However, to say they could have "excised" all risk is highly simplistic. Nothing is risk-free.
New York, for example, has about 20 percent of its debt in variable-rate debt. It issues this debt because different muni -ond investors demand different maturity dates; not everyone wants a 30-year bond. Diversifying issuances dates widens the investor pool. New York could make a different decision, but, if it issued all long-term bonds, it would face the risk of unnecessarily paying higher interest rates overall over the life of the debt. Investors would demand compensation for the liquidity risk, inflation risk, etc., inherent in longer-term bonds. It is just like if you put all of your money in CDs rather than stocks, you may reduce one type of risk (volatility), but you increase another type of risk (that inflation will eat away at your gains).
New York seems to have acted prudently in this case as an issuer, if not as a regulator. Access to the short-term debt markets is vital to any industry, including municipalities. To say that they took an unreasonable risk here in using these markets just as any big company's treasury department does is a bit much.
"they should be blamed for not excising as much Risk as possible.." -MEH
"...to say they could have "excised" all risk is highly simplistic. Nothing is risk-free."
-Nicole Gelinas
"Yes, the states incurred risk by issuing variable-rate bonds." -NG
"New York, for example, has about 20 percent of its debt in variable-rate debt. It issues this debt because different muni-bond investors demand different maturity dates"-NG
I see, the munis issued variable-rate debt because their targeted investors wanted a variety of maturity dates..Riight!~
Nicole,
you should really undersand how easy it is to shred a pool of income-producing assets, here, 30-yr fixed-rate bonds, into a wide variety of tranches that can mimic the entire yield-curve...until then, if I were you, I'd feel guilty about cashing my pay voucher..
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