Monday, February 18, 2008

Bond insurer split up could attract lawsuits

Interesting article from Bloomberg. Essentially they are saying that Investment Banks who own insured subprime investments would be able to sue where they suffer losses & make a claim but there are not enough funds available due to the insurer moving its assets to another entity (holding their municipal liabilities).

Here is a quote...

"Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years."

Here is the link

I wonder if the investment banks will give their consent to the proposed split up. They probably won't? The alternative might be as Warren Buffett proposed to re-insure these municipal bonds, effectively protecting policyholders even if the mono-lines can't pay at the end of the day (due to CDO loss payouts). But the mono-lines have already said no to the deal?

This is a very tricky situation. Of course, all of this resulted from the Insurance regulators letting the mono-line insurers write CDO insurance in the first place!

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