FGIC Seeks Split to Salvage Municipal Debt Ratings (Update7)

By Mark Pittman and Christine Richard


Feb. 15 (Bloomberg) -- FGIC Corp., the bond insurer stripped of its Aaa ranking by Moody's Investors Service yesterday, asked to be split in two to protect the ratings on municipal bonds it guarantees.

FGIC, owned by Blackstone Group LP and PMI Group Inc., applied for a license from New York state insurance regulators to create a standalone municipal company, Brian Moore, a spokesman, said. The move would separate the unit that guarantees subprime- mortgage bonds, collateralized debt obligations and the other types of financial products that led to the ratings downgrades.

``We will look at the business plan and we will see where it goes,'' New York Insurance Superintendent Eric Dinallo said in a Bloomberg Television interview today. ``Maybe just the filing of the application will invite capital in,'' he said.

Bond insurers including FGIC, MBIA Inc. and Ambac Financial Group Inc. are struggling to raise capital and remain intact after taking more than $8 billion in writedowns largely related to mortgage-linked securities they guaranteed. The insurers use their AAA ratings to back about $2.4 trillion of debt and losing that imprimatur casts doubt on the rankings of thousands of schools, hospitals and local governments around the country.

The application by FGIC may help the company attract new capital or create other options where it wouldn't have to follow through with a separation, Dinallo said.

``I think there is an opportunity instead of just selling the municipal side, so to speak, you might find it in the totality of the book,'' Dinallo said.

FGIC insures about $314 billion of debt, including $220 billion in municipal bonds.

Buffett Model

FGIC's request follows comments by Dinallo and New York Governor Eliot Spitzer yesterday on Capitol Hill that insurers may need to be split if they can't raise enough capital to compensate for losses on subprime-mortgage guarantees.

``Other bond insurers will be tempted to follow suit, especially the ones that have already been downgraded by at least one rating agency,'' said Donald Light, an insurance analyst at Celent, a Boston-based consulting firm.

Moore said FGIC wants to organize a new domestic financial guarantee insurer that ``would be used to provide support for public finance obligations previously insured by FGIC and write new business to serve the municipal markets.''

The concept of a division into two businesses follows a model proposed by Warren Buffett. The billionaire investor this week said he offered to take over $800 billion of the municipal debt guaranteed by the three companies for about $9 billion.

Last Resort

MBIA, based in Armonk, New York, fell 38 cents, or 3 percent, to $12.24 today in New York Stock Exchange composite trading. Ambac declined 31 cents, or 2.9 percent, to $10.22.

Dinallo and Spitzer at a hearing yesterday said dividing the insurers is a last resort and urged banks to put up capital for a bailout. New York regulators last month organized banks to begin plans for a rescue and are talking to private-equity firms and sovereign wealth funds, Dinallo said. The companies probably need about $5 billion and a line of credit for $10 billion, he said.

``You are either going to see capital infusion plans or some kind of a more dramatic structural change,'' Dinallo said in a Bloomberg Television interview from Washington yesterday, where he testified at a hearing of the House Financial Services subcommittee on capital markets into the insurers. ``A few months from now, the companies are not going to look exactly the same.''

Dinallo said today that he is working to get a rescue plan in place before MBIA and Ambac lose their top ratings, downgrades that he said could occur within one to two weeks.

Ratings Cuts

Moody's yesterday cut the ratings on FGIC's insurance units six levels to A3 and said they may be reduced again. FGIC itself was cut eight levels to Ba1, which is below investment grade.

Moody's said it plans to complete its reviews of MBIA and Ambac by the end of the month. Standard & Poor's, which cut its AAA grades on the insurance units last month, said today it is keeping FGIC's ratings under review for a possible downgrade.

The insurers are reeling from their expansion beyond municipal debt to CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk.

Banks, which bought protection for the CDOs, stand to lose $70 billion if bond insurers are stripped of their ratings, Oppenheimer & Co. analyst Meredith Whitney in New York said last month.

`Better Positioned'

Concern that MBIA and Ambac may lose their top rankings has spread to the $300 billion market for auction rate securities. Investors, wary that the municipal debt they are buying may soon be downgraded, have fled the market, causing more than $20 billion of auctions to fail this week.

The House Financial Services Committee in Washington will hold a hearing March 5 to examine how state and local governments are being affected by the reduction in available credit, committee Chairman Barney Frank, a Massachusetts Democrat, said today in an e-mail statement. He didn't say who will testify.

MBIA Chief Financial Officer Chuck Chaplin and Ambac Chief Executive Officer Michael Callen yesterday told the subcommittee they don't need a bailout or added oversight.

Moody's analyst Jack Dorer said yesterday that he plans to complete a review of Ambac and MBIA by the end of the month. MBIA has raised $2.5 billion of capital and Ambac sought insurance on some of its guarantees, making them ``better positioned'' than FGIC, Dorer said.

Moody's is saying ``they're not on death's door yet,'' said Christopher Whalen, a managing director at Hawthorne, California- based Institutional Risk Analytics. ``That's unfortunately what the market's been thinking, but these things are not going to collapse tomorrow.''

Dinallo's office regulates MBIA and has taken the lead in forcing changes at the bond insurers. While Ambac is based in New York, the company is primarily regulated by Wisconsin. Dinallo said he is regular contact with other state officials as well as federal regulators.