The soap opera that has become the nation's bond insurance market took another turn this morning, with the nation's largest insurer saying that it had brought back its former CEO in an effort to stave off a ratings cut -- and to explore the possibility of breaking up the insurer's structured finance and municipal debt businesses. MBIA Inc. said Tuesday that it will look to new CEO Jay Brown, the company's former chief and one of the company's original shareholders, as it re-examines its business model amid what Brown characterized as "changing conditions." In a letter to shareholders, Brown said that "the structure of the financial guarantee industry needs redesign," hinting that the insurer is considering a break-up of its business. Other monoline insurers, including Ambac Financial Group Inc. and FGIC Corp., are also considering a similar move. In an interview cited by Bloomberg, Brown was more blunt, and said a separation of its municipal bond business may be exactly what's needed:
"The market is telling us something," Brown said. "The marketplace is saying it doesn't work well to have two stores selling these products under one roof."
Brown replaces former CEO Gary Dunton, who some had said was put off by the prospect of working with the New York State Insurance Department. "I have already spoken with Superintendent Eric Dinallo," Brown said Tuesday, characterizing the discussion as "constructive." "I believe we can look forward to improved dialog with the Department," he said. The move by MBIA, which has raised $2.5 billion in capital since November of last year, comes as Ambac said Tuesday that it will look to raise $2 billion of capital for itself as a possible prelude to any break-up effort. Monoline insurers provided the top-rated portions of MBS deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that even potential downgrades to bond insurers are wreaking havoc on the already unsteady mortgage-backed bond market, as investment-grade securities are seeing their top ratings put at peril. For more information, visit http://www.mbia.com.