Posted on 02/21/2008 10:09:25 PM PST by TigerLikesRooster
The monoline clock is ticking
By Francesco Guerrera, Aline van Duyn and Ben White
Thu Feb 21, 1:20 PM ET
The poker game whose outcome could break the $2,400bn bond insurance industry and saddle Wall Street with billions of dollars in losses began in a drab, windowless room in downtown New York at 11 am on January 23.
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Gathered around the large brown wooden table, under the watchful gaze of past insurance watchdogs, whose austere pictures hang in a neat row along each of its the walls, were representatives of some of the world's largest banks.
Their host was Eric Dinallo, the fast-talking New York insurance superintendent, who had called the emergency meeting after growing increasingly concerned at the deteriorating health of bond insurers like Ambac and MBIA.
As the credit squeeze began gripping this previously-quiet recess of the insurance market, Mr Dinallo wanted to take action before credit rating agencies downgraded one of big "monoline insurers", averting a potential domino effect that could hit investors, municipal governments and Wall Street banks.
Mr Dinallo was so concerned with the possibility of an imminent downgrade that, during the previous holiday weekend, he had cut short a skiing break in the Berkshires, a scenic but unglamorous area on the northern edges of the state of New York, to make some urgent calls.
His intelligence was that, if no action were taken, a credit rating agency could strip a monoline insurer of its coveted triple-A rating within a week.
On Monday, January 21, when Americans celebrate Martin Luther King Day, he met Ajit Jain, the quietly-spoken head of the insurance division of Warren Buffett's Berkshire Hathaway. He asked Mr Jain to put a price on the municipal bonds guaranteed by the bond insurers, knowing that he needed some backup plan to protect this sector in the event of downgrades.
He also called a number of senior executives at banks. According to Mr Dinallo, not a single person he spoke to before the meeting said he should not hold it. Some, however, said they would not be able to attend because they were in Davos for the annual shoulder-rubbing extravaganza of the World Economic Forum.
In the status-obsessed world of Wall Street, it was decided that, because not all the CEOs would be able to attend, the Wednesday meeting would be attended by chief financial officers and chief risk officers.
As the executives converged on Mr Dinallo's offices, a nondescript building on Beaver Street, around the corner from the New York Stock Exchange, the superintendent was visibly nervous. He did not know the executives, and they did not know him. Wall Street was more used to dealing, if anything, with Treasury and Federal Reserve officials.
A quick Google search done before the meeting would have highlighted that Mr Dinallo was appointed by Eliot Spitzer, now governor of New York but who, as attorney general, was a thorn in Wall Street's side during his aggressive probes of banks' equity research.
Indeed, before entering the meeting room, the executives were greeted by two large pictures hanging over the reception area: Mr Spitzer and Mr Dinallo, side by side.
Mr Dinallo knew this was one of the most important meetings of his career, which has spanned public service, working with Mr Spitzer during his aggressive probe of equity research, and the private sector, with spells at Morgan Stanley and the insurance broker Willis.
"The purpose of the meeting was to flag up the problems that could develop if the ratings of the bond insurers were cut," Mr Dinallo said in an interview. "I talked about a lot of things, including company by company approaches, equity infusions, flip-over structures, back-up lines of credit, back-stopped rights offering and the good bank, bad bank concept should the ratings fall. I then asked, what do you think?"
Mr Dinallo's words were at first greeted with complete silence from the banks' representatives. Mr Dinallo said he had not appreciated how reticent banks would be to discuss the problem in the abstract in front on their competitors. "I had subsequent private phone calls with everyone, and I realised there are a lot of potential issues and other complexities for each of the banks," he said.
Some senior bank executives have privately said they were shocked by the meeting. How were the banks to determine who should contribute to saving the industry and how much when their exposures to the monolines varied so dramatically? And several of the banks had capital problems of their own following big writedowns on mortgage-related securities. Where would they get the money to come up with a bailout?
Since then, talks have continued around the clock to find a solution, aided by Perella Weinberg, hired by Mr Dinallo as his advisor. One person closely involved said that Mr Dinallo is having to manage a "cesspool of vested interests."
On one side, a group of banks led by Citigroup's new chief executive Vikram Pandit has been pushing to work out a deal for Ambac, to which Citibank is most exposed. A deal is expected to be imminent.
Merrill Lynch, one of the banks most exposed to MBIA, was at first reluctant to step in, according to several people involved in discussions. Yet even John Thain, chief executive, told the FT the meeting has raised interest in the bond insurance sector on the part of investors including private equity groups and specialists in distressed companies.
In the meantime, the clock continues to tick. FGIC has already lost its top-notch ratings. Ambac and MBIA, the biggest bond insurers, are likely to have another week or so to come up with a firm plan.
The political spotlight has started to shine more brightly on the crisis as municipal borrowers throughout the US face soaring interest rates and buyers of municipal bonds are facing losses.
Mr Buffett's offer to take over $800bn of municipal bonds, revealed by him just days before a Congressional meeting on the subject, was hailed by Mr Spitzer as evidence that action was being taken to protect municipalities.
William Ackman, the well-know "short" in the bond insurers, has been putting out highly cricitical research and information about the companies and their losses.
Sovereign wealth funds, private equity investors like Wilbur Ross, and senior bankers have been regular visitors to Mr Dinallo's offices.
When it is Mr Dinallo's turn as a former superintendent to have his picture hung on the conference room wall, he will be the best-know insurance regulator Wall Street has known. Whether it is fame or infamy depends on which hand wins the game.
Ping!
This is just the end of the beginning, IMO.
The end of the beginning? Can you explain? I don’t have much knowledge in this area.
I think we will see cascading effects of the subprime unwinding for years. It will migrate through nearly every area of the financial services industry. Even municipalities and states will eventually have difficulty obtaining credit.
It’s not the end of the world, but unfortunately our over-reliance on debt and leveraged personal, corporate, and public sector balance sheets is coming home to roost.
Thank you for the explanation. It didn’t sound like very good news.
Thinking of the over one thousand mutual bond funds, one would have to suppose none of their NAVs are real.
yitbos
The bond issue required a 2/3rds approval in both cities to pass. Pocatello voted 71% no. Chubbuck voted 83% no. A clear rejection of an ill conceived project and financing scheme.
Gasp! You mean cities won't be able to fund mega stadiums for their local NFL teams? The horror.
Gasp, you mean local governments will have to pay cash? Or raise taxes for their schemes? Actually, munis are prime debt. Buffett isn't dumb. He will have the only muni monoline with a AAA rating.
I see that UK's Northern Rock sold all their prime mortgage assets to an affiliate in the Channel Islands before the government decided to nationalize the bank.
yitbos
Sigh... I wish we weren’t building a new stadium here. It is an absolute fiasco what is happening to our taxes. I refer to this stadium as “the temple of Sport”, since it surpasses even the largest cathedrals in size.
btt
All the wheels of the Ponzi scheme have come off with respect to 'debt shuffling', 'debt leveraging', 'debt hiding', 'debt repackaging', 'handing out credit like it was popcorn', etc.
“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.” ~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen
Hah, I knew it. This would be at least the third FINAL DEADLINE! (organ music! thunderclap!) since late December. Waiting for the hammer to finally fall on these 'holes is like sitting in a plane on the tarmac getting another dubious excuse from the pilot every fifteen minutes.
The plane could run out of fuel at the tarmac while waiting for the eventual takeoff.:-)
On Monday, January 21, when Americans celebrate Martin Luther King Day, he met Ajit Jain, the quietly-spoken head of the insurance division of Warren Buffett's Berkshire Hathaway. He asked Mr Jain to put a price on the municipal bonds guaranteed by the bond insurers, knowing that he needed some backup plan to protect this sector in the event of downgrades.Interesting. Thanks for the ping, Travis.He also called a number of senior executives at banks. According to Mr Dinallo, not a single person he spoke to before the meeting said he should not hold it. Some, however, said they would not be able to attend because they were in Davos
Should start being tossed around in the next 30 days or so, maybe sooner.
L
There's a real crap storm coming over this.
L
My property taxes in Johnson City, TN doubled this past year so the ‘powers that be’ could fund their expansion programs for the city. Of course, the city can’t maintain the roads and bridges of the city they make us pay so highly to live in, but hey, they make the dumbed-down taxpayers think we’re progressing nicely. A few years ago, I offered the city 25 acres for a school and fire station at 10,000 per acre in the most rapidly growing area of the county/city. They didn’t even drive out to look at the property and just the other day bought acerage at $55,000 per acre for the same purpose but not as close to this growing areas so heavier bussing will be a must! [I sold the property plus 22 more acres four years ago, to a private party seeking a rollover for money he took out of the Vegas Area.] The experiences prove to me that municipal government leaders have no business conducting business, but they get away with it because they have the ‘eternal flow of tax money’.
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