WASHINGTON–Troubled bond insurers have only four to five business days to raise enough capital to keep their crucial "triple-A" credit ratings, Gov. Spitzer told a congressional hearing today.
Testifying before the Capital Markets Subcommittee of the House Financial Services Committee, Mr. Spitzer said if the added funds don't materialize, the state will force the insurers to split their healthy component that insures municipal bonds from the segment that guarantees derivatives and risks linked to subprime mortgage investments.
"We will need to move in that direction," Gov. Spitzer said. "It is not our first choice but time is short. It's time for deals to get done."
New York Insurance Superintendent Eric Dinallo said Friday following the hearing that rating firms have indicated that bond insurers Ambac and MBIA have more than five days to take action to repair their ratings. The rating of Financial Guaranty Insurance Co. was downgraded by Moody's and the firm applied to split the company along the lines outlined by the governor.
Mr. Dinallo testified that splitting the bond insurers business would ensure "that the funds paid by municipal governments would go to support their insurance, and not pay for the problems in structured finance.
"We believe that this plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds," the priority for state regulators, he added.
He also ruled out a federal bailout of the troubled bond insurers, saying it is "not planned."
The New York superintendent has taken a lead role in efforts to bolster the sagging fortunes of bond insurers, who have been blistered by unfavorable findings by rating agencies. He has been holding meetings with banks, federal regulators and others within the bond market concerns.
The concept of splitting the bond insurers from their municipal segment was advanced earlier this week by billionaire investor Warren Buffett, who offered to provide reinsurance to back up the municipal bonds guaranteed by three top mortgage insurers.
In other comments Gov. Spitzer urged Congress not to rush to create a federal insurance regulator for the bond industry.
Mr. Spitzer's remarks concerning federal oversight came in response to comments in an article published earlier in the week in a Capitol Hill newspaper by Rep. Paul Kanjorski, D-Pa., chairman of the subcommittee.
In his signed article, Rep. Kanjorski said the problems faced by bond insurers pointed to the "real need" for better regulation of bond insurers–a need that might be best served by an optional federal charter.
Mr. Spitzer testified that "the fact that the states need to improve does not lead to the conclusion that federal regulation of insurance is the answer, especially given the performance of other federal regulators on this issue."
In his opening statement, Mr. Kanjorski said he convened the hearing because, "like a child with matches, [the bond insurers have] gotten burned. We must hope that they did not ignite our economic house, as well."
He added that bond insurance is a "microscopic segment" of the market, explaining that in 2006 bond insurers collected less than one-third of a percentage point of the total premiums collected by the insurance industry. But "even though it is very small, its importance is much greater" than its size, he said.
And, in listing possible legislative measures, Mr. Kanjorski said that "we could mandate federal insurance supervision in this narrow field," but did not mention any broader optional federal charter legislation.
Mr. Spitzer said, "To those who have raised the issue of federal regulation of insurance, I would note that just creating an agency with the power to act does not guarantee it will in fact act."
He explained, "Creating a national regulator will not make a difference if those appointed to run it choose not to use those powers effectively.
"Many failures have been caused by the lack of federal regulatory entities to regulate–or worse, to block–prudent regulation by others," Mr. Spitzer said.
"One of the benefits of having 50 state regulators is that it is more likely that someone will recognize a problem and act on it," he said.
He also said that "some people say the federal government should be leading the effort" to probe the bond insurance industry. "But the facts are that insurance is regulated by the states and most of the bond insurance companies are domiciled in and primarily regulated by New York."
And he noted that Wisconsin-domiciled Ambac has its actual headquarters around the corner from the New York Insurance Department office in Manhattan.
The hearing grew more intense with the appearance of Bill Ackman, founder and manager of Pershing Square Capital Management, the manager of a New York hedge fund that has been betting that bond insurer fortunes would decline and selling their shares short.
Mr. Ackman criticized Mr. Dinallo's efforts to seek a bailout for bond insurers from banks and brokerage firms that are big counterparties to the bond insurers.
"A more efficient solution would involve the banks taking the extra write-downs and being more transparent about their exposures," Mr. Ackman testified. "These firms could then raise more capital or be bailed out themselves, which would be a better option than the indirect method of propping up ailing bond insurers."
Charles Chaplin, chief financial officer of MBIA, responded by urging lawmakers and insurance regulators to halt "the unscrupulous and dangerous market manipulation activities of short sellers."
He demanded, on behalf of MBIA, that the practice and dissemination of "half-truths and misleading information" should be "investigated and curtailed."
This article updated Feb. 15, 10:28 a.m. EST
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