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Thread: weekend commentary - Gov. Spitzer proposes splitting off Muni Bond Insurance

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    Default weekend commentary - Gov. Spitzer proposes splitting off Muni Bond Insurance

    Obviously, NY's governor Spitzer like his fellow governors Schwerzenegger, Corzine etc. is supressing panic mode after seeing the isolated instances of Muni Bond Auction failures turn widespread this past week. All of these states are running huge budget deficits, which they can only paper over by A) cutting social welfare benefits and public sector employment by 5-10%, B). raising state tax revenues by 5-10% (= raising tax rates by 10-20% since only 1/2 of state residents actually pay taxes), or C) sell new muni bonds to get fresh cash and let state taxpayers pay the bond interest for the next 20 years.

    However, as auctions fail, the interest rates that must be paid on new muni bonds have been ASTRONOMICAL ( most recent failure was NY Port Authority which wound up paying a 20% yes that's right 20% interest rate on their failed auction bonds). Those sort of interest rates takes the bond option off the table as a means of allowing states and state agencies to temporarily 'balance' their budgets.

    So what Spitzer is proposing is new law / regulation that would split the bond insurance business into Muni bond insurance and private sector bond insurance, which would then theoretically remove the insurance 'fear factor' that is now stopping would-be buyers from snapping up new Muni bonds at low interest rates. Doing so would solve Spitzer's problem ... but

    ... doing so would also create a NEW problem, by shifting all of the bad risk onto the private sector bond insurers. This could cause many billions of dollars of additional losses for the investment banks, hedge funds etc.

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    Default Re: weekend commentary - Gov. Spitzer proposes splitting off Muni Bond Insurance

    more on Spitzer ...

    (snip)"However, our government and its relationships with private businesses have gotten out of control. There are thousands of examples, such as all the earmarks and pork barrel projects. But let me give one example to highlight how subtle, sinister, and pervasive this corruption truly is.

    Higher borrowing costs and general credit market difficulties "could be a financial tsunami that causes substantial damage throughout our economy," Spitzer said in the testimony prepared for delivery to a House of Representatives Financial Services subcommittee. Great. That sounds great. Good for Spitzer.

    "We have been clear from the beginning that municipal investors cannot be allowed to suffer from problems caused by another sector of the market," he said. Ok. Now he lost me. The government is supposed to protect investors? Why would he say such a thing?

    There must be a reason.

    Let's see.

    PROBLEM

    1) MBIA makes money providing guarantees on municipal bonds.
    2) However, MBIA gets greedy and starts guaranteeing subprime mortgages and CDOs, and not just municipal bonds.
    3) MBIA gets caught in the downturn and is threatened with bankruptcy (which they totally deserve). Their greedy CEOs bet too much too fast.
    4) Bankruptcy would weaken their guarantees, not just for CDOs and other exotic financial instruments, but for the municipal bonds as well. Okay. We have a problem. And it's a big problem. No one wants cities and schools to go bankrupt. But what is the solution?

    SOLUTION

    1) The high-paid, free-wheeling, free-market CEOs go running to the government for help! Here's where Spitzer and friends come in.
    2) Spitzer sees an opportunity to save the world, look good, help the poor suffering masses, and advance his career (all at the same time!). A government solution? What could be better? It will be good for everyone: borrowers, the system, MBIA, and Spitzer.
    3) Unfortunately, Warren Buffett steps in and says he will guarantee the municipal bonds (ending the crisis) but that MBIA will have to deal with the CDOs and other exotic products on their own. So the crisis will be over, but MBIA will still go bankrupt. This seems like a very good and fair solution. The cities, schools, and system are saved, but the CEOs who gambled (and got highly paid to do so) have to suffer.
    4) MBIA rejects Buffett's offer and instead works with Spitzer and other regulators to try to have the government provide guarantees (in other words, we the taxpayer pay to bail out the CEOs, all in the name of "saving the system," even though Buffett offered a tax-payer-free way to do the same).
    5) Spitzer supports MBIA over Buffett! Amazing! And he's fighting for the common folk? Why would Spitzer do this? Could it be that he will (a) be seen as having rescued MBIA (instead of Buffett); (b) get massive campaign support for MBIA executives and all their friends; (c) get a high-paid job with MBIA or friends of MBIA after leaving office [if you don't believe me, look at where the New York Fed guys ended up after Long-Term Capital, which incidentally, Buffett ALSO offered to buy and was rejected].

    Spitzer is smart. He knows how to play the game. "This could have been avoided if the OCC had done its job," Spitzer said in the interview. "The OCC did nothing. The Bush Administration let the housing bubble inflate and now that it's deflating we're dealing with the consequences." Ok. Now you have everyone on board. Nobody likes Bush these days.

    According to a Reuters article: "Spitzer deflected questions about New York state's role 10 years ago in allowing bond insurers, which had long guaranteed safe public-sector bonds, to back risky mortgage bonds and complex structured debt." Hmm. So maybe it's not so simple after all, Mr. Spitzer.

    I've always imagined Robin Hood led a pretty good life in Sherwood Forest."(snip)

    from

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