In an article in the February 7, 2008 Wall Street Journal, Susanne Craig and Liam Pleven reported that New York Insurance Superintendent Eric Dinallo is pressuring Wall Street’s top firms to formulate a plan to rescue troubled bond insurers. In a January 23rd meeting with 30 senior officials at top Wall Street firms, including Citigroup, Goldman Sachs, Merrill Lynch, and Morgan Stanley, Dinallo left no doubt who he thought was responsible for the mortgage meltdown that has caused a loss in value of the securities guaranteed by the insurers as the housing market weakens. “You created this mess,” Dinallo told senior officials of Wall Street’s top firms. “And the headline on this is going to be: ‘How Wall Street Ate Main Street.'”
Not surprisingly, Dinallo’s aggressive approach is apparently ruffling some Wall Street feathers. Not all of the attendees agreed with Dinallo’s assessment that the failure of bond insurers could “pose a systemic risk to the financial markets.” Some of these attendees appealed to senior officials at the Treasury Department and the New York Federal Reserve to take the lead role if any rescue efforts were needed.
Dinallo was a key aide to Governor Elliott Spitzer during Spitzer’s tenure as Attorney General, and he was a bulldog in Spitzer’s crusade against Wall Street firms that issued misleading research reports. Together Spitzer and Dinallo won a $1.4 billion settlement from 10 big Wall Street firms, including some who participated in the January 23rd meeting.
Currently, eight banks and brokerage firms are working to rescue Ambac Financial Group Inc., which lost its top credit rating from one rating agency and faces a possible downgrade from another. Meanwhile, the investment-banking unit of Cr?dit Agricole SA is leading a separate group of banks to arrange a possible bailout of bond insurer Financial Guaranty Insurance Co.
If the bond insurers are downgraded, Wall Street could suffer an additional $40 to $70 billion in losses, and local governments could see an increase in their borrowing costs. If Dinallo can help find a solution, it will be another instance of a state leading the effort to solve a national financial crisis instead of a procrastinating federal government.