According to a February 14, 2008 story by Christine Richard and James Tyson at Bloomberg.com, bond insurers may be split into two separate businesses in what would be the biggest overhaul since the industry was created almost 40 years ago. In prepared testimony to the House Financial Services Subcommittee on Capital Markets, New York Insurance Department Superintendent Eric Dinallo said that such separation is one of the proposals regulators have been discussing with struggling bond insurers, FGIC Corp., MBIA Inc., and Ambac Financial Group Inc. Dinallo, whose main goal is to protect borrowers and debt holders, said, “One would have the municipal bond policies and any other healthy parts of the business. The other would have the structured finance and problem parts of the business.”
New York Governor Eliot Spitzer told the subcommittee that although the split is not seen as “optimal,” it may be necessary if the insurers cannot raise the capital needed to avoid credit-rating downgrades. Losing the AAA ratings bond insurers use to guarantee $2.4 trillion municipal and mortgage-backed debt lowers confidence in the rankings of thousands of hospitals, schools, and local governments around the country.
Since demand for AAA rated securities currently exceeds supply, New York has invited new companies to provide bond insurance. “We cannot allow the millions of individual Americans who invested in what was a low-risk investment lose money because of subprime excesses. Nor should subprime problems cause taxpayers to unnecessarily pay more to borrow for essential capital projects,” Dinallo said.