A bailout for bond insurers. How about big banks?
Posted
Jan 29 2008, 05:08 PM
by
Douglas McIntyre
The head of insurance regulation in New York is busy as a bee trying to bail out Ambac and MBIA. According to the FT, "Eric Dinallo, the New York state insurance superintendent, is being privately supported by the New York Federal Reserve Bank and other regulators." If the muni bond insurance companies go under it could lead to a new round of fixed income instruments write-offs which would hurt Wall Street balance sheets.
If the government is going to drag the muni bond insurance companies out of their mess, why not a little help for the likes of Citigroup, Washington Mutual, and Wells Fargo?
Mr. Dinallo is attempting to get the big U.S. banks to provide the bond insurers with $15 billion in credit to shore up their balance sheets. It is an interesting proposal but it does beg the question of where the cash-strapped banks will get the money. It could be the beginning of a 21st Century version of borrowing from Peter to pay Paul.
Aid to bond insurance companies is an artificial way to keep a part of the market that probably should collapse from collapsing. Fellows like Alan Greenspan and Warren Buffett want the free market to take its course. The only argument against that may not be very compelling. A bailout probably keeps Wall Street from a panic that would leave tens of thousands unemployed and the financial sector torn to ribbons.
But, in the calculus of which financial institutions mean most to the system, the largest banks and brokerages would seem to be at the bedrock. The government does not seem to be at work there. It has left most of that to sovereign funds and new management teams.
Saving the bond insurers and letting the big banks struggle is like saving the leg but letting the body die.