2008 0214 - GOV (House) - The State of the Bond Insurance Industry, Paul Kanjorski (D-PA)

  • (p1) - Chairman Paul Kanjorski (D-PA). Do these insurance institutions have the rate to participate with Federal Home Loan Banks?
    • [Bonk: Typo - "rate" = "right"]
  • Eric Dinallo. I am sorry. I did not hear the very last part.
  • Chairman Kanjorski. Why could the insurance companies not make an application to the Federal Home Loan Bank system for a line of credit?
  • Mr. Dinallo. I do not know the answer to that.
    • Certainly, the investment banks that are the counterparties to their policies could make such an application, and you could do the re-insurance that way.
  • Chairman Kanjorski. We should look into that.
    • I certainly would be amenable, and that is one way to spread the risk.
  • (p11) -  Chairman Paul Kanjorski (D-PA). It seems to me that we are flying down a road at a tremendous speed here that could bring into collapse the entire financial market as we know it today, not only in the United States but potentially it could move around the world and metastasize.
    • I am just disturbed that there are not too many people who are really speaking to the issue, and those who are speaking to the issue are assuming that somebody else is doing something about it.
    • Maybe I would like to know what the Governor of New York and what the superintendent of insurance of New York feel you can do surgically in the areas in which you have jurisdiction?
  • Governor SPITZER. (NY) - Yes, sir. I agree with your final conclusion there.
    • I am torn between two objectives.
      • One, as I just said in my opening statement, is to generate a sense of concern such that we can move any potential deals with great rapidity,
      • and on the other hand, not to speak with such dire prognostication that the capital markets begin to sense there is no hope out there, because so much of this is emotional and driven by the analysis of what is likely to happen rather than what actually has happened, not to generate that cascading effect that we are concerned about.
  • (p16) - Spencer BACHUS (R-AL). Let me ask you this. During your tenure, and I think what you are saying is you are acknowledging there was a fundamental failure of the New York Department of Insurance.
  • Governor Eliot SPITZER (New York). No. What I am saying is there was a multitude and a sequence of events that led to the subprime mortgage guarantees-
  •  Spencer BACHUS. Doesn't the New York Department of Insurance- they approved the bond insurers investing in the subprime securitization market which was a risky market.
  • Governor SPITZER. I think that is a topic of conversation, and as I said, one of the underlying causes here was expansion of their jurisdiction from what used to be monoline businesses into the much more risky area of the securitized market.
  • Mr. BACHUS. The State Department of Insurance would have to approve their  investment.
  • ----------------------
  • (p17) - Governor SPITZER - Mr. Bachus, you are involved in a finger pointing exercise. I am more than happy, sir, to get involved in that and go through with precise detail where this Administration failed at a regulatory level to stop multiple scandals.
  • ----------------------
  • (p19) - Spencer BACHUS (R-AL) -  I guess my only point is as we look at these various agencies, the credit rating agencies, the investment banks, I think the State of New York has to accept some responsibility in that they were primarily-the bond insurers-were regulated by the New York Department of Insurance. Whether that was under your watch or someone else's, I think that is a fact.

MBIA – Municipal Bond Insurance Association

  • MBIA and its predecessor the Municipal Bond Insurance Association, when we were a joint underwriting association, have now insured over 10,000 bond and note issues across the United States.

—  Peter P. Kelly, is Senior Vice President and Group Director of Business Development and Secondary Market Insurance Products for Municipal Bond Investors Assurance Corporation in New York, New York

1988 – SOA – Financial Guarantees, Society of Actuaries – 22p

2000s

  • 2002 1209 – Bill Ackman / Gotham Partners – “Is MBIA Triple A?” – 55p
  • 2008 0421 – MBIA – Financial Liquidity Crisis, Jay Brown, Georgetown, CSPAN – [link]
  • 2008 0618 – NYT – MBIA debt is setting up standoff with regulators, By Gretchen Morgenson and Vikas Bajaj – [link]
  • 2008 0620 – MBIA – Press Release – MBIA Comments on the Impact of the Moody’s Downgrade of MBIA’s Insurance Financial Strength Rating to A2 on its Asset/Liability Management Business – 2p

2010s

  • 2010 0217 – NYT – Judge Denies a Dismissal in a Suit Against MBIA – [link]
  • 2010 0410 – WSJ – Judge Dismisses Most Claims in Merrill-MBIA CDS Suit, By Chad Bray – [link]
    • The swaps contracts between MBIA and Merrill were written between September 2006 and March 2007, according to the lawsuit, before Merrill’s tie-up with Bank of America.
  • 2011 0314 – WSJ – Former N.Y. Regulators Disagree With MBIA Split, By Katy Burne And Serena Ng – [link]
    • Former Regulators – James Corcoran, Edward Muhl, Gregory Serio and Richard Stewart
  • 2011 0322 – FT (Financial Times) – MBIA loss estimates $10bn short, say banks – [link]
  • 2011 0628 – NYT – New York Court Permits Banks to Sue MBIA – [link]
  • LC – MBIA Insurance Corporation v. Countrywide Home Loans, Inc.
    • 2011 0611- Mozilo Deposition – 140p
    • (p29) – Q. So are you aware that MBIA wrote multiple billions of dollars of financial guarantee insurance on RMBS created by Countrywide?
    • A. I only know that as a result of this deposition.
    • (p31) – Q. Was MBIA and the other monolines entitled to accept the representations and warranties made by Countrywide as truthful?
    • MS. CONCANNON: Objection.
    • MR. SIEGEL: Go ahead.
    • MR. SELENDY: We have it.
    • MR. SIEGEL: Oh, question’s vague and argumentative.
    • MR. TU: Also calls for a legal conclusion.
    • THE WITNESS: I have no — I have no idea what you’re talking about.
    • MR. SELENDY: Okay.
  • (p229-231) –  Q. Okay. And you wrote: “I don’t understand why a potential loss of this magnitude was discovered after we had given guidance for the fourth quarter and no one in senior management nor the board was aware of this potentially.”
    • What potential loss are you talking about there?
  • A. I have no idea, no recollection of it.
  • Q. Could it be loss in connection with litigation with monolines?
  • MS. CONCANNON: Objection. Calls for speculation, vague, overbroad, lacks foundation.
  • THE WITNESS: I have no idea.
  • BY MR. SELENDY:  Q. Mr. Sambol writes back to you, saying: “It appears there was”
    • — First he says:  “We should have been aware of this exposure earlier.”  
    • And then he says:  “It appears that there was a disconnect between our Secondary Marketing and Credit areas, which I’m sure a number of factors contributed to: The number of issues they’ve been dealing with, their staffing and capacity constraints, the change in the credit department leadership with McMurray’s departure, Kevin’s absence, the rapid pace of credit deterioration, and the fact that up until recently nobody would have envisioned this trigger being tripped.” Do you see that?
  • A. Uh-huh.
    Q. Do you have any understanding of what “trigger” he’s talking about?
  • A. No.
  • MS. CONCANNON: Objection.
  • THE WITNESS: I don’t have any recall on it.

Bond Insurers - Media

  • Monolines
  • Bond Insurance
  • Bond Wraps
  • Financial Guarantor
  • AFGI - Association of Financial Guaranty Insurers
  • MGIC Investment
  • Radian Group
  •  ACA
    • Maryland Insurance Administration - Company Regulator
    • FCIC - Interview - mp3
    • Bear Stearns
  • AIGFP
  • Ambac
    • Wisconsin Insurance Commission - Company Regulator
    • subsidiary - Connie Lee
  • Assured Guaranty
  • Berkshire Hathaway Assurance
    • New York Insurance Commission - Company Regulator
  • Capital Markets Assurance Corporation
  • CIFG Holding
  • Financial Guaranty Insurance Co.
    • FGIC = Parent Company
    • FGIC owned by the Blackstone Group and the PMI Group
    • New York Insurance Commission - Company Regulator
  •  Financial Security Assurance (FSA)
    • Dexia = Parent Company - Belgian-French financial group
  • MBIA
    • New York Insurance Commission - Company Regulator
    • Channel Reinsurance, a firm that reinsures securities for MBIA
  • SCA - Security Capital Assurance
    • XL Capital Assurance 
    • XL Financial Assurance
    • Syncora
    • New York Insurance Commission - Company Regulator
    • Merrill Lynch Lawsuit
    • 2008 0729 - Reuters - Dinallo sees bond insurer crisis closer to end, By Joseph A. Giannone - [link]
      • The bailout of bond insurer Security Capital Assurance solved one more piece of the credit crunch puzzle and brought more certainty to a critical part of the financial markets, New York Insurance Superintendent Eric Dinallo told Reuters on Tuesday.
      • Merrill Lynch & Co MER.N on Monday helped bail out Security Capital SCA.N by canceling $3.5 billion of credit default swaps (CDS) and withdrawing litigation.
        • SCA will be released from swap guarantees it sold to Merrill and will pay $500 million to the bank.
  • Eric Dinallo - New York State Superintendent of Insurance - January 2007 through July 2009
  • Bill Ackman
  • 2008 0310 - CRS - Bond Insurers: Issues for the 110th Congress - 12p

2007

  • 2007 1123 - NYT - French Banks Acquire Bond Insurance Company - [link]
    • The banks, Groupe Banque Populaire and Groupe Caisse d'Epargne, paid $1.5 billion to take ownership of CIFG Holding from Natixis, a French banking company in which each bank holds a 34 percent share.
  • 2007 1219 - NYT - Banks Study Bailing Out Struggling Bond Insurer, By Vikas Bajaj and Gretchen Morgenson - [link]
    •  ACA Capital Holdings
    • The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. 
    • It is unclear how much capital it would take to shore up ACA. Another solution the banks are discussing would relieve ACA of having to post collateral against its insurance contracts if the company is downgraded.
    • Investment banks, hedge funds and insurance companies often use credit default swaps to bet on or against bonds without trading the underlying securities.
      • Warren E. Buffett and other critics have described the contracts as financial time bombs, because they say that traders often misprice risk of default and do not set aside enough reserves to cover claims.

2008

  • 2008 0124 - NYT / CNBC - Officials Move to Rescue Shaky Bond Insurers - [link]
  • 2008 0124 - Reuters - US CREDIT-Ambac, MBIA CDS rally may be short-lived - [link]
    • Any plan to help bond insurers will take "some time" because of the complexity of the issues and the number of parties involved, New York State Insurance Superintendent Eric Dinallo said in a statement on Thursday.
    • Yesterday, New York's insurance regulator pressed major Wall Street banks to put up billions of dollars to support the bond insurers, which guarantee interest and principal on $2.5 trillion of bonds.
  • 2008 0125 - Deseret News - Banks May Need $143 Billion for Insurer Downgrades - [link]
  • 2008 0125 - Bloomberg -
    • <WishList> - 203. The January 25, 2008 Bloomberg article stated, in part: Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Assurance Corp. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Barclays' estimates are based on banks holding as much as 75 percent of the $820 billion of structured securities guaranteed by bond insurers.
  • 2008 0125 - The Economist / CFO.com - Buddy, Could You Spare Us $15 billion?:  Another shady realm of finance goes begging for a massive bail-out., Economist Staff -
    • A lifeline for the monolines
      • No wonder, then, that a group of banks is giving ear to a request from New York's insurance regulator, Eric Dinallo, who oversees some of the big monolines, to discuss a possible rescue.
        • In preliminary talks held on January 23rd, Mr Dinallo reportedly asked the banks to stump up as much as $15 billion to help MBIA and Ambac preserve their ratings.
      • The regulator, who apparently has the blessing of federal officials, is talking to other potential investors too, said to include Wilbur Ross, a vulture investor, and Warren Buffett's Berkshire Hathaway, which recently set up its own bond insurer and has not ruled out buying part of a troubled rival.
  • 2008 0129 - Reuters - NY bond insurer bailout plan too late-CreditSights, By Dan Wilchins, Karen Brettell - [link]
    • New York State Insurance Superintendent Eric Dinallo is working with banks to figure out how to rescue the industry...
    • But analysts at research firm CreditSights write that multi-step downgrades are a real possibility now, because rating agencies are setting high capital requirements high and the public markets for raising capital seem closed to the bond insurers now.
  • 2008 0202 - NYT - 8 Banks Discuss Aid for Bond Insurer - [link]
    • Ambac is in more dire financial straits than its larger rival, MBIA, which has raised $1.5 billion in recent weeks.
    • MBIA and Financial Guaranty are regulated in New York by Mr. Dinallo's office.
    • Ambac is regulated in Wisconsin.
      • The insurance commissioner for that state, Sean Dilweg, said on Friday that he was confident that the company was in sound financial health but was working with the company "as it develops and implements its business plan in response to the current market conditions."
      • "For the protection of policyholders, Wisconsin has substantial financial requirements pertaining to municipal bond insurers," he said in a statement.
        • "Ambac meets and exceeds all these statutory requirements."
      • Ambac disclosed in a regulatory filing Friday that it was granting cash bonuses of $700,000 to $800,000 to four senior executives. 
    • 2008 0208 - NYT / By Bloomberg News - MBIA Sells Stock to Aid Rating and Raises $1 Billion - [link]
      • MBIA has raised about $2.5 billion since November, and it said that it would contribute most of the proceeds to its insurance company.
      • Warburg Pincus already bought $500 million of MBIA stock this year.
      • MBIA also sold $1 billion in surplus notes and cut its dividend by 62 percent.
  • 2008 0213 - NYT - Ambac Financial rejects Buffett's bond insurer bailout - 13p
    • Ambac Financial Group, the first bond insurer to lose its triple-A credit rating amid the U.S. mortgage market collapse, rejected an offer by Warren Buffett to hand over control of the company's municipal-bond business.
    • Ambac, MBIA and other bond insurers are reeling largely from an expansion beyond their traditional municipal-bond insurance businesses into guaranteeing riskier structured-finance products including mortgage-liked securities and collateralized debt obligations, or CDOs.
      • CDOs repackage such assets as mortgage bonds and buyout loans into new securities with varying risk.
  • 2008 0214 - NYT - Large U.S. bond insurer balks at bailout plan - [link]
    • New York State regulators are working with bond insurers and banks to ease financial strains in the bond insurance industry that government officials say threatens to hurt communities, individual investors and the wider economy.
      • But an official of MBIA, one of the biggest bond insurers, said in testimony to a panel in the House of Representatives that a rescue plan was unnecessary.
    • The chairman of Ambac Financial Group, Michael Callen, said "stable and predictable" credit ratings by the agencies are needed to restore confidence in the industry.
  • 2008 0214 - NYT - MBIA to Call on Congress to Rein in Ackman - [link]
    • In written testimony for a subcommittee of the House Committee on Financial Services, MBIA said that short sellers like Mr. Ackman, founder of the hedge fund Pershing Square Capital Management, have worked hard to undermine market confidence in the bond insurers.
    • MBIA said lawmakers should help restore confidence in the bond insurers, because their failure could have far-reaching effects on the U.S. and global economies.
    • MBIA also included as an appendix a timeline of actions by Mr. Ackman, and to a lesser extent by other short sellers.
    • Mr. Ackman, who is also expected to testify before the committee Thursday, has persisted in challenging MBIA's AAA credit rating for more than five years, saying MBIA hasn't been forthcoming about backing risky financial instruments such as those based on loans to the least creditworthy homebuyers.
    • The war of the words comes as the three major U.S. credit rating agencies are deciding whether MBIA has enough funds to keep its AAA rating.
    • Eliot Spitzer, New York's governor, is expected to testify at the same hearing that the current turmoil could lead to a "financial tsunami that causes substantial damage throughout our economy."
      • According to The Bond Buyer, Mr. Spitzer - whose insurance regulator, Eric Dinallo, is attempting to help bail out the bond insurers - will argue that state regulators, banks and ratings agencies can shore up the bond insurance industry without resorting to a federal regulator.
    • For his part, Mr. Dinallo will propose letting the bond insurers split their principal municipal bond guarantee businesses from the problematic business of insuring complex debt instruments, Reuters reported.
    • Mr. Ackman has urged Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke to abandon the idea of a bank-led rescue plan, arguing that it would "prolong the term and severity of the recent credit contraction."
    • Mr. Ackman, however, had at least one backer in his corner. MarketWatch columnist Herb Greenberg roundly chastised MBIA for calling on Congress to rein in Mr. Ackman's practices.
      • "[R]ather than accept the reality that it caused its own problems with bad business and actuarial decisions, MBIA is complaining to Congress about the guy who blew the whistle, Mr. Greenberg wrote.
        • "Seems that rather than crucify him, they should give him the Congressional Medal of Honor."
  • 2008 0215 - FT (Financial Times) - Monolines explained - [link]
    • In late January New York insurance regulator, Eric Dinallo, urged major banks to provide up to $15bn (£7.6bn) to support the monoline industry in an effort to stem the threat of additional losses for banks and other financial institutions with exposure to some of the over $2,400bn of debt guaranteed by bond insurers.
  • 2008 0215 - NYT - Bond insurer plans to break into two companies - [link]
    •  The bond insurer Financial Guaranty Insurance Co. is expected to apply to the New York State Insurance Department to separate into two companies, the regulator said Friday.
    • On Thursday, FGIC had its critical financial strength rating cut by Moody's to "A3" from "AAA." Bond insurers essentially need a "AAA" rating to book new business.
      • To maintain its top-caliber rating, Moody's said, FGIC needs to be able to access $9 billion. The company only has access to $5 billion, Moody's said.
    • Both Standard & Poor's and Fitch Ratings have already downgraded FGIC.
    • Fitch has also downgraded Ambac Financial Group and Security Capital Assurance, while Standard & Poor's has downgraded SCA. Moody's also lowered its ratings for SCA.
  • 2008 0216 - NYT - A Split-Up of Insurers of Bonds Is Considered - [link]
    • "It takes the whole thing out of the hypothetical and into reality," Eric R. Dinallo, the New York State insurance superintendent, said in a telephone interview.
      • On Thursday, he and Gov. Eliot Spitzer told Congress that they were considering encouraging a split in the insurance portfolios as a last resort.
    •  (MBIA and Ambac officials still assert that they have enough capital to cover future losses, which they say their critics have exaggerated.)
    • If MBIA and Mr. Dinallo remain at odds over whether the company needs to do anything, the dispute could end in court, legal experts say.
      • Mr. Dinallo has significant power as superintendent to take control of insurers if he believes there are not enough assets to pay claims by policyholders, but the company and its policyholders can fend him off if they can prove his decisions are "arbitrary and capricious," said Francine L. Semaya, an insurance lawyer at the law firm of Cozen O'Connor.
      • Mr. Dinallo said on Friday that the negotiations with MBIA had not progressed as far as the talks involving Ambac and Financial Guaranty.
        • "I feel optimistic that this Ambac consortium is doing real work they are engaged," he said. "I am optimistic that they will come to a private-side economic solution."
  • 2008 0218 - NYT - Arcane Market Is Next to Face Big Credit Test, by Gretchen Morgenson - [link]
    • Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago.
      • But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.
    • And last week, the American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated.
      • Its stock dropped 12 percent on the news but edged up in the days after.
    • "This is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result," said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. "I think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark."
    • Because these contracts are sold and resold among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim.
    • Credit default swaps were invented by major banks in the mid-1990s as a way to offset risk in their lending or bond portfolio.
      • At the outset, each contract was different, volume in the market was small and participants knew whom they were dealing with.
    • Officials at the International Swaps and Derivatives Association, a trade group, say they are confident that the market will stand up, even under stress.
    • But financial history is rife with examples of market breakdowns that followed the creation of complex securities. Financial innovation often gets ahead of the mechanics necessary to track trades or regulators' ability to monitor the market for safety and soundness.
    • But 16 percent were created to protect holders of collateralized debt obligations, complex pools of bonds that have recently experienced problems because of mortgage holdings.
      • There is no exchange where these insurance contracts trade, and their prices are not reported to the public.
      • Because of this, institutions typically value them based on computer models rather than prices set by the market.
    • Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations.
  • 2008 0220 - NYT - Bond Insurers Claim Conflict in Buffett's Moody's Link, Report Says - [link]
  • 2008 0221 - NYT - Ackman Proposes Plan for Bond Insurers - [link]
    • On Tuesday, MBIA's newly appointed chief, Joseph W. Brown Jr., told The New York Times that he would consider splitting MBIA into two parts.
  • 2008 0222 - NYT - Bond Insurer MBIA Pulls Out of Trade Group
  • 2008 0222 - NYT - Report on Potential Ambac Bailout Reverses Stock Slide - [link]
    • Update: The New York Times reported Friday afternoon that Ambac will split itself into two parts and raise $3 billion.
    • The plan, drafted by a consortium of eight banks including Citigroup and UBS, still needs approval by the credit ratings agencies but could be formally unveiled as soon as Monday.
      • But that seemed to reverse sharply late that afternoon after CNBC's Charles Gasparino reported that a deal to save the triple-A rating of Ambac Financial, the second-largest bond insurer, was near.
    • That move, which has also been suggested in different forms by the New York insurance superintendent, Eric R. Dinallo, Berkshire Hathaway's Warren E. Buffett and a short seller, William Ackman, would shield municipalities against defaults in the structured finance business.
      • It would also help preserve the credit ratings of the municipal business, keeping the cost of borrowing lower for local governments and the like.
    • Analysts like Meredith Whitney of Oppenheimer Research have estimated that banks could suffer as much as $75 billion in additional charges if bond insurers are downgraded.
    • According to CNBC, New York's insurance department believes that both Ambac and its larger rival, MBIA, have enough assets to cover losses stemming from their insurance of CDOs.
      • But the bigger question is whether those companies will suffer downgrades - and whether they can attract new business, as many municipalities can by law hold only triple-A-rated securities.
  • 2008 0226 - NYT - New Outlook on Bond Firms Ignites Rally - [link]
    • The credit-rating firm Standard & Poor's helped incite a broad stock rally in the afternoon when it affirmed the triple-A ratings of MBIA and Ambac Financial, the two bond guarantors, saying the companies have made progress in raising capital and restructuring their businesses.
    • Since late last year, investors have worried that a downgrading of MBIA or Ambac could generate losses across Wall Street, because many investment banks and other large investors are counting on the firms to back bonds they own.
    • On Monday, Fitch Ratings, another rating firm, said a downgrading would be generally "manageable" but would severely pressure three banks that have struggled with big write-downs on mortgage-related securities: Citigroup, Merrill Lynch and UBS.
    • Even as investors looked forward to the end of the turmoil surrounding the bond guarantors, there were signs that some companies remained troubled.
      • On Monday, S.& P. downgraded the credit ratings of three other insurers, Financial Guaranty Insurance, XL Capital Assurance and XL Financial Assurance.
      • And on Friday, Moody's downgraded Channel Reinsurance, a firm that reinsures about $43 billion of securities for MBIA, to Aa3, from triple-A.
  • 2008 0228 - FT (Financial Times) - Markets assess the costs of a monoline meltdown, Gillian Tett - [link]
    • The potential implications are so severe that Eliot Spitzer, governor of New York, warned last week that if the authorities did not soon produce effective action to address the monoline problem, the consequence "could be a financial tsunami that causes substantial damage throughout our economy"."
    • All of a sudden, the world has been gripped by monoline fever," observed a recent report from Citigroup, the investment bank.
      • It says that investors are now scrambling to see if the monoline problems are the next example of the "glue which holds together the world financial system" coming apart.
    • However, the chain reactions extend well beyond Wall Street.
      • Or as Congressman Spencer Bachus, the Republican representative for Alabama, puts it: "Unlike other events that have destabilised markets since the credit crunch began last summer - where the pain has been felt largely on Wall Street - the fallout from the troubles in the bond insurance industry is already hitting Main Street."
    • Indeed, Eric Dinallo, the New York insurance superintendent, admits that regulators have failed fully to comprehend the link between ratings and the guarantees from bond insurers.
      • As a result, regulation will be reformed to focus on ratings rather than on solvency, he says.
      • "This [bond insurance] might be the only area of insurance where the ratings are as important as the solvency," he says.
    • In the short term, however, the more immediate problem for policymakers is how to prevent the chain reaction inside the financial sector from extending even further.
    • But the monoline issue has raised anxiety about whether other counterparties in the CDS world, such as hedge funds, will be able to honour their contracts if corporate defaults rise.
      • While the International Swaps and Derivatives Association, the main trade body, vehemently insists this risk should be offset by the fact that most trades are backed by collateral, levels of investor unease are nevertheless rising.
    • However, as the Bank of England observed, what the US mortgage market and corporate debt world have in common is that lending standards have crumbled in recent years - partly because banks have been repackaging this debt and selling it on to investors rather than holding it themselves.
    • Today, private equity firms wanting to buy companies have begun writing equity cheques for the whole thing, reasoning that they can eventually go to the debt market to refinance, according to Doug Warner, a lawyer at Weil Gotshal & Manges in New York.
    • But the main ghost haunting the market is the uncertainty about the economy. If the economy really slows dramatically, corporate cash flows will dry up.
      • Then, companies with heavy debt burdens will find it even harder to pay their debt - creating even more trouble ahead.
  • 2008 0229 - NYT - A Freaky Friday for Bond Insurers - [link]
    • By taking a big stake in Assured, a smaller bond insurer but widely regarded as rock-solid, Mr. Ross said that the firm would be able to expand its reinsurance business.
      • It has already agreed to reinsure $29 billion worth of securities in Ambac's portfolio; Bloomberg News says that move will free up $225 million in capital for the beleaguered Ambac.
  • 2008 0327 - NYT - U.S. bond insurer FGIC says its risk exceeded legal limits - [link]
    • IKB
    • "This is a bombshell," said Rob Haines, senior insurance analyst at CreditSights in New York.
      • "They are actually in violation of New York insurance law.
      • If they don't remediate this, the state has the ability to take control of the company."
  • 2008 04 - NYT - Provisions cause surprise loss at Nomura - [link]
    • Nomura Holdings, the largest Japanese brokerage company, on Friday posted a surprise quarterly loss of $1.5 billion on its exposure to bond insurers and warned that it could still be at risk for further losses related to the credit crisis.
    • Nakada said the financial health of monoline insurers had deteriorated so much that they were not able to pay Nomura what they had guaranteed, forcing it to increase the provision.
  • 2008 0618 - NYT - MBIA Debt Is Setting Up a Quandary, By Gretchen Morgenson - [link]
    • The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns.
    • Most of these contracts stipulate that if MBIA's bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.
    • But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company.
      • So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.
    • The acceleration clause is a standard feature in credit default swaps written by many bond guarantors, including Ambac and the Financial Guaranty Insurance Company.
    • The company said it had changed its thinking because S.& P. and Moody's Investors Service, another rating firm, recently have indicated that a $900 million injection into its existing insurance subsidiary might not be enough for the unit to maintain its current high ratings.
    • But Joshua Rosner, an analyst at Graham-Fisher in New York, said, "It seems to me that if Jay Brown insists on putting the money anywhere other than at the insurance subsidiary or through a new subsidiary directly under it, he is making a very clear statement that he no longer believes in the viability of the insurance company to meet its obligations."
    • The swaps' acceleration clauses appear to be a factor in this bit of brinksmanship, although MBIA does not advertise their existence.
      • In a presentation about its first-quarter results, for example, MBIA said its "insurance contracts are not subject to acceleration."
    • Mr. Dinallo said he would consider allowing MBIA to put the $900 million into a new company if it reinsured the municipal bonds in MBIA's existing insurance unit.
    • But others are not so sure.
      • John Miller, chief investment officer at Nuveen Asset Management, a big municipal bond fund manager in Chicago, voiced skepticism about MBIA's plans to start a new insurance subsidiary that could reinsure its existing portfolio.
      • "It would be surprising to me if it would be successful," Mr. Miller said.
      • "It will still be an MBIA-insured bond and then reinsured also by MBIA, but MBIA as a new company."
  • 2008 0809 - NYT - Naked Came the Speculators, By Gretchen Morgenson - [link]
    • At the urging of Eric R. Dinallo, New York's insurance superintendent, Merrill Lynch agreed two weeks ago to unwind $3.7 billion of insurance it had bought on the mortgage-related obligations.
      • Merrill received $500 million from XL Capital Assurance to close out the insurance contract that its parent, Security Capital Assurance, had written.
    • There are several remarkable elements to the agreement.
      • First was its valuation: only about 13 cents on the dollar.
      • Because the value of the mortgage obligations covered by the insurance had crashed, it was shocking that the insurance was not worth far more than that.
    • But these deals are only as good as the party on the other side, and when Security Capital's crucial credit rating was cut to junk earlier this year, the potential that the company would pay out on the arrangement dimmed.
    • ⇒  The Merrill deal also represents a template for future arrangements intended to unwind C.D.S.'s, Mr. Dinallo said.
    • Indeed, on Aug. 1, the Ambac Financial Group, another bond insurer, unwound $1.4 billion in credit insurance it had written on mortgage-related securities at 61 cents on the dollar.
    • Still, Mr. Dinallo said, the valuations of C.D.S.'s remain absurdly optimistic on both the books of the bond insurers who wrote them and the companies who bought them.
      • As regulator in this particular poker game, he gets to see both parties' hands.
    • Mr. Dinallo is pushing for similar arrangements with 13 other banks that bought credit default insurance from Security Capital.
    • It is easy to see why Mr. Dinallo wants these swaps off of insurers' books.
      • As of last September, bond insurers had written some $656 billion in credit insurance on structured finance products.
      • Some $126 billion of that covers the kind of mortgage thingamabobs Merrill was trying to protect.
        • Yet the insurers' resources to pay those claims stood at $54 billion.
  • American Bonded Mortgage Company
  • 1966 0216 - NYT - Grand Jury Indicts Eight In Bonded Mortgage Case, American Bonded Mortgage Company - [link]  ---  1p
  • 1966 1223 - NYT - Seven Found Guilt of Securities Fraud, American Bonded Mortgage Company - [link] --- 1p
    • The Securities and Exchange Commission charged the seven misled the investors by promising to guarantee their principal, plus a 7 to 8 percent profit.

Bond Lending

  • re: Bond Lending / [Securities Lending]
  • There was also some discussion of the lack of liquidity associated with this program and it was felt that that is certainly consideration which must be taken into effect by companies contemplating such transactions.

1986-1, NAIC Proceedings – MINUTES WORKING GROUP ON EMERGING ISSUES CHICAGO ILLINOIS – NOVEMBER 1985 – (p211)

1936 – GOV (House) – Investigation of Real Estate Bondholders’ Reorganizations – Part 20

  • 1936 December 1, 2, 3, 7, 8 – GOV (House) – Investigation of Real Estate Bondholders’ Reorganizations – Part 20 – Adolph J. Sabath (D-IL)   —   [BonkNote]
  •  [1915p-GooglePlay] – Parts 19 and 20
    • Part 19 – (p6-946) – 1936 – November 30, December 4, 5, 9, 10, 15, 28, 29 – Chicago, ILL  —  [BonkNote]
    • Part 20 – (p948-1906) -1936 – December 1, 2, 3, 7, 8 – Chicago, ILL 
  • House – Subcommittee of the Select Committee on Investigation of Real Estate Bondholders’ Reorganizations or Subcommittee of the Select Committee to Investigate Real Estate Bondholders’ Reorganizations
  • General American Life Insurance Co., of St. Louis, Mo.
    • Walter W. Head – president of the General American Life Insurance Co., of St. Louis, Mo.
    • P. B. McHaney – attorney, of St. Louis, Mo., representing the General American Life Insurance Co
  • Investigators
    • J.M. CRUME – Chief Actuary of the Investigation
    • James P. Sullivan – Special Actuary or the Investigation
    • J. L. TUPY – Chief Investigator
  • Missouri Insurance Department
    • R. Emmet O’Malley – Missouri Insurance Department – Superintendent of Insurance – July 1, 1933-? – (p140-)
    • Joseph Thompson, Missouri Insurance Department- Superintendent of Insurance – ?-July 30-? 1933) – (p72-73) 
    • Carrolle E. Nelson- Missouri Insurance Department – Actuary -Since  (September 1, 1930-Current)
      • For 5 years previous to that I was with the Missouri State Life Insurance Co., of St. Louis, Mo.
  • Extras
    • People v. Dorsey, 363 Ill. 403 (1936), April 17, 1936 · Illinois Supreme Court · No. 23053
      363 Ill. 403
    • Machir J. Dorsey
    • Arthur J. Morris
  • Missouri State Life Insurance Co., of St. Louis, Mo.
  • (p1) –  J. L. TUPY, Chief Investigator: This morning, Mr. Chairman and gentlemen of the Congress, we are going to take up the receivership of the Missouri State Life Insurance Co., of St. Louis, and the matter will be presented by Mr. J. M. Crume, our chief actuary ; Mr. James P. Sullivan, our special actuary ; and Mr. Thomas Sheridan.
  • CHAIRMAN. Have you, yourself, made investigation in the matter?
  • Mr. TUPY. Yes, sir. The investigation has been carried out under my supervision by the gentlemen I just named, and although I know the general facts of the matter, they know the details and that is why they will present it instead of myself.
  • CHAIRMAN. And you think it is a matter that should be heard?
  • Mr. TUPY. Yes; unquestionably. I think it is a matter that should be heard by your committee. It is a matter involving a billion-dollar organization and several hundred thousand insurance policyholders, and, of course, the question of this reorganization of the receivership.
  • (p3) – J.M. CRUME – (Chief Actuary of the Investigation)
    • Let me state, Mr. Chairman, that the investigation made into various receiverships in which millions of our citizens’ savings and investments have been involved, has included quite properly an investigation of many large insurance receiverships that have occurred in this country during the past depression era.
    • These insurance receiverships have involved some billions of insurance and the savings and investments of millions of our people.
    • These insurance receiverships include life, fire, title, and other types of insurance companies that have gone down in the business crash.
    • ⇒  Your investigation into insurance receiverships developed some rather startling situations with respect to their liquidations and reorganizations.  
    • We find that companies have been operated with all the appearance of solvency for periods of months, and even years, while it was known that they were actually insolvent.
  • (p4) – J.M. CRUME – (Chief Actuary of the Investigation) – re: the Missouri State Life Insurance Co. of St. Louis, Mo.
    • This company had approximately one billion of life insurance in force when it failed.
      • It held approximately $160,000,000 of premium payers and widows’ and orphans’ savings funds.
      • This is the largest serious failure of any old-line legal-reserve life-insurance company in the history of this country.
    • Its failure was preceded by manipulations involving numerous other insurance companies that leave one amazed when recited.
  • (p7) – Mr. Sullivan – Now, it later developed that early in 1936 a deal was consummated which resulted in the sale by the Equity Corporation, or its associated companies, who were then owners of 90 percent of the General American Life Insurance Co.’s stock, of that stock to a newly formed holding company, organized in Dallas, called, I believe, the Southwestern Investors Holding Co. The exact name will come out in the testimony.
    • This newly formed holding company in Dallas was created entirely by the use of money of the Southwestern Life Insurance Co. with the money secured by the holding company in three varied processes, the Eastern or Equity Corporation, the holders of the stock of the General American Life Insurance Co., sold their stock to this newly formed holding company in Dallas for $2,700,000. So that as the matter now stands the Southwestern Investors Holding  Co., of Dallas, Tex., owns and controls the General American Life Insurance Co.
  • The CHAIRMAN. Who sold that stock?
  • Mr. SULLIVAN. The Equity Corporation and its affiliates that owned it. The exact ownership of the stock at the time of the sale will come out in the testimony.
  • The CHAIRMAN. They sold it to the holding company.
  • Mr. SULLIVAN. To the new Southwestern Investors Holding Co. of Dallas.
  • (p7) – James P. Sullivan (Special Actuary or the Investigation)
    • So that as the matter now stands:
      • the Southwestern Investors Holding Co., of Dallas, owns and controls the General American Life Insurance Co.
      • The General American Life Insurance Co. owns or rather controls as trustee, the Missouri State Life Insurance Co., or what is left of it.
      • The Missouri State Life Insurance Co. assets holds or controls the Southwestern Life Insurance Co.,
      • and the Southwestern Life Insurance Co. owns and controls the Southwestern Investors Holding Co.,
        • so that now we have a complete circle.
    • You can start anywhere in the circle and go around and end up where you started.
    • What we desire to attempt to show the committee is the interlocking of these companies and the evils which attach themselves to the life insurance business as the result of those interlockings.
  • (p12) – The CHAIRMAN. Do you mean to tell me that one of these companies, the Southwestern Life, advances the money to the holding company to buy stock that was owned by still another corporation?
  • Mr. SULLIVAN. That’s right; by still another holding company; that is correct.
  • (p13) – Mr. Sullivan – Now, this case is an important case before this committee, because, in one way or another, it is a pattern, with few variations, of the system under which practically every tragic life insurance receivership of the last 6 or 7 years has been handled in this country. 
  • (p13) – Mr. SULLIVAN. As we go along, we would like to have the committee notice how these things have happened, and have been allowed to happen, because of faulty and deficient statutory regulation of life insurance.
    • And we believe that we shall indicate, to an extent at least, the kind of statutory regulation which is necessary to eliminate these abuses.
    • It is our understanding that this is the purpose of this committee, to ascertain the facts as to what has been done in past cases, in order that you may have the basis for an intelligent recommendation for remedial legislation and regulation.
  • (p13) – Mr. SULLIVAN. As we go along through the evidence, though, the conversation between the examiner and the witnesses will be in the terms of millions and hundreds of millions of dollars.
    • It is necessary, if the committee is to comprehend all the facts truly, that you remember that these funds are the savings of people who were very glad to be able to save $5, $10, $15, $20, or $100 a year.
    • When we are talking about hundreds of millions, remember that somebody saved $10 at a time to help make it, and he saved it because he was horrified at the idea of his wife working in a laundry after his death, or his baby crying for milk after he wasn’t here to buy it.
    • That is what makes the tragedy of this proposition.
    • We are not here for the purpose of harassing any person or company, and we are not going to harass any person or any company.
  • The CHAIRMAN. The committee will not permit that.
  • Mr. DIRKSEN. May I suggest you be extremely careful to offer no gratuitous observations that may in any way reflect upon the company and do it harm, when there is no necessity or justification for it. We must be very careful.
  • Mr. SULLIVAN. I will certainly try to do that, and I will be glad to be stopped when I am stepping over. We are not here for the purpose of discrediting legal reserve life-insurance companies. Legal reserve life insurance is the greatest financial device that the mind of man has yet created.
  • (p14) – Mr. Sullivan: Our investigation will not have the effect of disturbing anyone about his life insurance or his life insurance company.
    • On the contrary, our investigation will show the great and huge strength of legal-reserve life insurance, which has grown in spite of the things that have happened to it, and the things that have been done to it by its managers. 
    • When this investigation, as a result of the committee’s activities, has been completed, legal-reserve life insurance will be in far better shape than it has ever been.
    • Compared with other human activities, life insurance is in its swaddling clothes.
      • Banking is centuries and centuries old. Life insurance is about a hundred years old, as we know it in this country.
      • Life insurance is growing; it needs to grow right, casting out the bad and changing to meet the new developments in society, just as much as every other human operation changes if it is to have continued existence.
      • We don’t learn through our successes. We are too busy being happy over them.
        • If we learn at all, it must be through our failures.
  • (p17-18) – Mr. HEAD. Mr. Chairman, may I for the benefit of the committee suggest that there have been pages and pages of newspaper articles?
  • The CHAIRMAN. We haven’t seen any of them.
    • We have been busy investigating and getting information and trying to pass legislation to relieve conditions, bring about legislation that will eliminate those matters that were detrimental to the investors and, in this case, to the policyholders and bondholders and that’s all. 
  • (p19) – Mr. O’MALLEY. That is not an answer to my question, Mr. Head.
    • I think all of us can get along if you will try to help the committee instead of trying to confuse us.
    • We know nothing about the insurance business, and we have open minds.
  • Mr. HEAD. There is no attempt to confuse you.
  • (p27) – Mr. SULLIVAN. And you declined the invitation?
  • Mr. HEAD. If you can understand English, that is just what I said.
  • ————
  • Mr. HEAD. … Why does this fellow take the rest of the day asking me the same questions two or three times?
  • The CHAIRMAN. He wants to know whether-
  • Mr. HEAD. He knows. I have talked it over with him.
  • Mr. SULLIVAN. No; I don’t know.
  • Mr. HEAD. He knows the whole story. I would like to tell this committee something about what he said to me about the General American Life Insurance Co.
  • The CHAIRMAN. He is not testifying.
  • Mr. HEAD. I hold in my hand here an article written by him which he circulate
  • Mr. DIRKSEN. Let that be stricken from the record.
  • The CHAIRMAN. All right.
  • Mr. HEAD. He isn’t as dumb, Mr. Chairman, as he lets on.
  • The CHAIRMAN. He doesn’t show any dumbness.
  • Mr. HEAD. That depends upon who makes the interpretation.
  • (p31) – Mr. HEAD. He told me that the demands of the policyholders on the company were so great that the resources of the company, in his judgment, would probably not be sufficient, with the ability of the management to convert them into cash, to meet the demands.
  • Mr. DIRKSEN. You mean that the policyholders were borrowing on their policies?
  • Mr. HEAD. That’s right.
  • Mr. SULLIVAN. And that the company was in such condition that it couldn’t meet those demands?
  • Mr. HEAD. That’s correct
  • (p31) – … in cash that the company had to have, the old company, to continue in business.
  • Mr. SULLIVAN. But he did suggest that they needed cash to stay in business?
  • Mr. HEAD. He indicated they would have to have some new capital.
  • Mr. SULLIVAN. Did he indicate that the Missouri State Life Insurance Co. at that time was in an insolvent condition and would remain so unless it got additional funds?
  • Mr. HEAD. I am not sure that he ever said to me that the Missouri State Life Insurance Co. ever used the word “insolvent.”
  • Mr. SULLIVAN. What word did he use?
  • Mr. HEAD. Mr. Chairman, may we stop until my picture is taken?
  • The CHAIRMAN. Somehow or other it has become the custom of these newspapers to take pictures at all times, everywhere.
  • Mr. SULLIVAN. Will you read the question? (Question read by reporter.)
  • Mr. HEAD. I don’t recall the words but I do recall that Mr. Nardin indicated to me that in his judgment the company would probably be unable to convert resources into cash in sufficient amounts to meet the demands of the policyholders. 
  • (p31-32) – Mr. SULLIVAN. At any time in these conservations with Mr. Nardin did he state to you that the insurance superintendent of Missouri, Mr. Joseph Thompson, had appeared before the board of directors of the Missouri State Life Insurance Co. in February 1932 and stated to that board of directors that an examination of the company which he had just completed showed their condition to be irretrievably insolvent, in February 1932?
  • (p32) – Mr. HEAD. He told me he felt positive that the company would require additional capital and, if it couldn’t get additional capital, there would have to be a reorganization.
  • Mr. DIRKSEN. Would a reasonable and prudent person be justified in inferring, if he heard this conversation with Mr. Nardin, that the company was insolvent at that time?
  • Mr. HEAD. I think that one who was accustomed to the conditions that existed there would readily understand that the company might be insolvent – yes.
  • Mr. DIRKSEN. At least, it was on precarious ground?
  • (p32) – Mr. HEAD. That’s right. I had no connection with the Missouri State Life Insurance Co. in any way, shape, or form during the entire period of its existence, except as a policyholder. And I would like to say for the record that I am still a policyholder. I still keep my policy in force. It is a paid-up policy and the same lien was placed against my reserves as against everybody else’s reserves. 
  • (p33) – Mr. HEAD. I want to answer your question because they do want to hear it. It was rather difficult for anybody, regardless of how serious they were, to determine the value of real estate, real estate mortgage loans, and the actual value of bonds.
  • Mr. O’MALLEY. Mr. Head, you have been in the banking business ?
  • Mr. HEAD. Yes, sir ; I have.
  • Mr. O’MALLEY. You had a very fair idea, as a banker, what mortgages were worth at that time, didn’t you?
  • Mr. HEAD. I would like to be able to say yes or no to that question, but that doesn’t answer the question. In 1933 there were many mortgages in default which subsequently were reinstated and subsequently paid in full or are regarded good at the present time. Now, the direct answer to the Congressman’s question, in one of those instances, the depreciation of the bond account alone was in excess of the total capital surplus and undivided profits of the company. 
  • (p33-34) – Mr. HEAD. I’d like to say to the Commission, to the chairman and members of the committee, that I should be delighted to give the names, but both of them are still in business, and I would regard the publicity as being very dangerous.
  • Mr. SULLIVAN. I think that is right. If they are both still in business.
  • The CHAIRMAN. You will give it to us privately?
    Mr. O’MALLEY. The only comment I want to make…
  • The CHAIRMAN. I am not going to permit anything to be done that would embarrass any company that is now operating.
  • Mr. O’MALLEY. Mr. Chairman, after the statement, I don’t think anything could affect these companies.
  • Mr. HEAD. Mr. Chairman, as a life insurance man, I object to this statement from a member of the committee.
  • The CHAIRMAN. You will give us a statement later on?
  • Mr. SULLIVAN. If they are companies that have been put in receivership, we would like to have their names.
  • Mr. O’MALLEY. I would suggest, Mr. Chairman, if all this is so mysterious, that we ought to have an executive hearing on it.
  • Mr. HEAD. There is nothing mysterious about this.
  • Mr. O’MALLEY. The same thing came up in Philadelphia, Mr. Chairman. And I was under the impression that this committee was to gather information to submit to our colleagues in the House. If we can’t get the information, we might as well quit.
  • The CHAIRMAN. We will get it.
  • (p38) – Mr. TUPY. Mr. Chairman, this gentleman who has just come in and is making stenographic reports was not summoned or asked to come here by the committee.
  • Mr. McHANEY. Mr. Chairman, I requested the stenographer to be here.
    • There are five or six people taking notes. Newspapermen are here taking notes.
    • We want to be sure what is said.
  • The CHAIRMAN. We made a rule not to permit any outside reporters.
  • (p40) – Mr. SULLIVAN. I have been trying to get there for 2 hours.
  • Mr. HEAD. Why didn’t you ask me?
  • (p60) – Mr. HEAD. It did not commit itself to pay me any salary until after the Missouri State Life had been purchased. So far as the question, if you just ask me what you want I could give it to you in a minute, but you go clear around the barn and all over the lot.
    • You wanted to find out if I wanted to go into the life insurance company business if the Missouri State was not purchased by us, and the answer is “no.”
  • (p62) – Mr. SULLIVAN. And you told them if you couldn’t get it the way it was drawn originally you wouldn’t take it at all?
  • Mr. HEAD. No; I didn’t.
  • Mr. SULLIVAN. What did you tell them?
  • Mr. HEAD. Why didn’t you ask me that in the first place?
  • The CHAIRMAN. Don’t argue, please.
  • Mr. SULLIVAN. What did you tell them? There is no intent to keep…from answering any questions.
  • Mr. HEAD. Won’t you please ask me the questions you want me to answer and not put three or four in one?
  • Mr. O’MALLEY. Try to accommodate the witness, Mr. Sullivan. You must bear with us and with our staff.
  • Mr. HEAD. I have no animosity,
  • Mr. O’MALLEY. Because of the inability of Congress to furnish us with the funds necessary, we sometimes cannot spend the hours on preparing these questions that could be done by the attorneys of a powerful corporation.
  • Mr. HEAD. You understand this gentleman [Mr. Sullivan] and myself have argued this case days at a time, don’t you?
  • The CHAIRMAN. We don’t know anything about it. We want the information. 
  • (p63) – Mr. HEAD. Does anybody in the audience know what he is asking me?
  • Mr. O’MALLEY. Now, wait a minute. Mr. Chairman, I am either going to withdraw from this hearing now-I have other things to do-unless the witness will indicate in some way that he has some respect for the Congress of the United States. I don’t care whether he has any respect for me or not. I have never seen him before; but his appeal to the audience, his appeal to other places, is the sheerest contempt which I have seen in 4 years.
  • Mr. HEAD. I offer my apologies to the Congress.
  • The CHAIRMAN. Now, will you please answer the question
  • Mr. HEAD. I don’t even know what the question is.
  • Mr. SULLIVAN. A contract was drawn under which these.
  • Mr. HEAD. Why don’t you ask me the question?
  • The CHAIRMAN. He is asking you the question.
  • Mr. HEAD. I can’t understand that.
  • The CHAIRMAN. And I am nowhere near as intelligent as you are, and I understand that question.
  • Mr. O’MALLEY. He is just making sport of the committee.
  • Mr. HEAD. No; I am not.
  • Mr. O’MALLEY. I will cite you in a minute for contempt. Now you observe some courtesy here. If you don’t like the way he puts the questions.
  • (p70) –  Mr. O’MALLEY. It is a public record insofar as the States are concerned, isn’t it?
  • Mr. MCHANEY. No.
  • Mr. O’MALLEY. Do you mean to tell me that a policyholder in my State cannot go into the examiner’s office and look over that preliminary report ?
  • Mr. MCHANEY. That is exactly right.
  • Mr. O’MALLEY. Then by gosh, we have got to change the laws in our State. 
  • 96 – Mr. SULLIVAN. Mr. Head, I am not criticizing you at all, I am simply trying to develop the facts as to how the company is managed and who knows what in the organization of the company, that is information which this committee wants, if life insurance companies are being operated along lines which keep one officer, the chief officers, from knowing all about the company perhaps. 
  • 96-97 – The Chairman: What we want to know more or less regards the manipulation of the assets of these corporations and the various interests that are held on the part of one company in another company, whether that is within the law, whether it is wholesome and beneficial or whether it should stop , or whether it should be encouraged. I, myself, look with a great deal of disfavor on one life insurance company holding stock in another, and I do not know whether it is within the law, or whether they are permitted under the law to hold stock in a great many other companies doing the same kind of business, and that is what we want to ascertain. And furthermore, what I would like to know now is this: Here was a corporation, a life-insurance company you say with assets of about $150,000.000 which has been sold, and you have read the contract, is the money of the very corporation that has been sold to another
    corporation.
    Mr. SULLIVAN. That is right.
    The CHAIRMAN. So the corporation that acquired it did not pay anything for it , but they bought $150,000,000 of assets without paying in any money whatsoever, is that right?
    Mr. SULLIVAN. That is correct and the sale approved by the court, for $100,000, and that $100.000….
  • 97 – The CHAIRMAN. That is what I am going to try to ascertain, what is the underlying reason for acquiring a life-insurance company whose assets, we will say, are about $25,000,000 less than their liabilities. Why anybody wants to buy and pay anything for a $25,000,000 liability I cannot understand.
    Mr. SULLIVAN. I will explain that to you.
    The CHAIRMAN. Well, I have an idea, of course, that it is done to get control of the business, and then they do as they please with it.
    Mr. SULLIVAN. No ; they first wipe out that $25,000,000 deficit, Congressman, by reducing the liabilities to the policyholders in the sum of $25,000,000 or more, so that the new company is O.K.
    The CHAIRMAN. How can that be done ? 
  • 97 – Mr. SULLIVAN. It is done by a court order. Congressman, they received an order of the court reducing its obligations to the policyholders. Suppose the policy has a $ 100 cash value, or a reserve, that is an obligation which the company does not have enough assets to meet, we will say, so by court order they put a lien against that.
    The CHAIRMAN. So by court’s order the benefits under the policy are reduced and that was the reason why the deficit on the part of the outside State examiners was only $14,000,000, but on the part of the Missouri insurance commissioner or investigator or examiner was $29,000,000?
    Mr. SULLIVAN. That is right.
    The CHAIRMAN. So that the court deducted the $29,000,000?
    Mr. SULLIVAN. Instead of $ 14,000,000.
    The CHAIRMAN. Instead of $ 14,000,000 from the value of the policies that the people had been paying their premiums on for years.
    Mr. SULLIVAN. That is correct. Except for the actuarial and legal terminologies you have got it exactly right.
    The CHAIRMAN. I would like to get the facts.
  • 98 – Mr. SULLIVAN. About $25,000,000, and that is income which this new company has had out of that business since they took it over.  Of course that has decreased some, because there has been a good deal of lapsation of the business. 
  • 98 – Mr. GOODMAN. There is just one thing, Mr. Chairman, I would like to bring out on the benefits, and that is that none of the death benefits, by virtue of this contract, approved by the court, were handled in any way detrimental to the policyholders. They got full payment as their policies originally called for. I just wanted to point out to this committee that you could not get the cash value of the policy, temporarily the policy cash value had a 50-percent lien against it , but death benefits have right along been paid in full and are being paid in full now and up to the present time this lien won’t impair that. In other words, when this contract was entered into, these liens have been materially reduced.
    The CHAIRMAN. Were all the benefits paid since 1933 in full, according to the policies?
    Mr. GOODMAN. All death claims have been paid in full; all maturing policy obligations have been paid in full.
    Mr. O’MALLEY. Taken out of the assets of the defunct company?
  • 98-99 – TESTIMONY OF COURTNEY S. GOODMAN – I am associated with James P. Aylward, of Kansas City, Mo., as counsel for Mr. O’Malley, commissioner of liquidation of the Missouri State Life
  • Mr. SULLIVAN. Do you know the provision in the reinsurance contract which provides that the company shall carry an extra $50 of insurance on his life for 15 years?
  • Mr. GOODMAN. An extra $50 of insurance?
  • Mr. SULLIVAN. That is right.
  • Mr. GOODMAN. You mean by that the lien, and if he should die within the year; yes.
  • Mr. SULLIVAN. Just a minute, do you know that provision?
  • Mr. GOODMAN. I don’t understand your question.
  • Mr. SULLIVAN. I will try to make it simple: Are you familiar with the fact that this contract provides that from the date of this contract the company shall carry an extra $50 of life insurance on his life; are you familiar with that?
  • Mr. GOODMAN. I still do not understand that; I may not be familiar with it, but I don’t understand it.
  • Mr. SULLIVAN. You would not understand it near as well if I read it to you?
  • The CHAIRMAN. Give him the provision in the contract.
  • Mr. SULLIVAN. You won’t understand it near as well.
  • Mr. GOODMAN. Maybe I will if you read it correctly, but I don’t understand your question, frankly.
  • Mr. SULLIVAN. I will ask you to step down and I would like to call Mr. Coburn to the stand. Later we may want you back.
    (Witness temporarily excused. )
  • 105 – Mr. CRUME. They would have to account for them in some way. Now, when this man dies, was there a reduction in that book account of any amount for the lien that had existed against that policy?
  • Mr. COBURN. Yes, sir; $50 was struck out of that lien account.
  • Mr. CRUME. Was taken off that book account?
  • Mr. CORURN. Yes, sir.
  • Mr. CRUME. All right. Now, when you credit an account, I say lien account, what account is that debited against?
  • Mr. COBURN. The Missouri State Life account.
  • Mr. CRUME. But doesn’t this contract provide that the costs of handling that item would be charged against the profits, the profits and so forth, that we are talking about?
  • Mr. COBURN. That is part of the Missouri State Life account.
  • Mr. CRUME. Then in substance the earnings made do pay for the liens – is that right?
  • Mr. COBURN. Yes, sir.
  • Mr. CRUME. And that is what we have been asking you all this time?
  • Mr. COBURN. I didn’t understand it.
  • Mr. CRUME. I am trying to explain it, that in the matter of lien costs the earnings are used to pay the liens, do provide for the payment of the liens; is that right ?
  • Mr. COBURN. Yes, sir.
  • Mr. CRUME. Does that answer your question?
  • TESTIMONY OF ARTHUR COBURN
    (The witness was duly sworn by the chairman. )
    Mr. SULLIVAN. Now, Mr. Coburn, your name?
    Mr. COBURN. My name is Arthur Coburn.
    Mr. SULLIVAN. Your address ?
    Mr. COBURN. Dallas, Tex.
    Mr. SULLIVAN. Your occupation ?
    Mr. CORBURN. Vice president Southwestern Life Insurance Co., Dallas, Tex.
  • 108 – TESTIMONY OF WALTER HEAD-Resumed
  • 125 – 
  • 140 – TESTIMONY OF ROBERT EMMET O’MALLEY – Missouri Superintendent of insurance (Since July 1, 1933.)
  • Commissioner Emmett O’MALLEY. Yes; I would say so. The business fell to $700,000,000 from $1,000,000,000 in 2 years. The business suffered from the inevitable widespread publicity, and people had drawn out; the younger policyholders who could get insurance elsewhere got out of that company, so the business dropped to $700,000,000, including that same group insurance and term insurance that I am talking about. The average age of the policyholder now is 43 years.
  • Mr. SULLIVAN. None of your actuaries or legal advisors upon whom you depended and upon whom you had a perfect right to depend, called your attention to this sentence ?
    • Commissioner O’MALLEY. I didn’t say that, I said I don’t recall any of them specifically calling it to my attention. If they had, it passed out of my mind just as well as if they didn’t.
  • 155 – Mr. DIRKSEN. Mr. O’Malley, were you engaged in insurance practice before you became insurance commissioner?
  • Commissioner O’MALLEY. Merely as a life-insurance underwriter; I never had any executive experience or actuarial experience.
  • Mr. DIRKSEN. How long had you been a life-insurance underwriter?
    Commissioner O’MALLEY. Seven years.
  • 156 – 
  • 156 – Mr. NELSON. No; it is customary that they make up such a statement, but it does not say anything about where that statement shall be filed. In other words, the company must have that statement in its files.
  • The CHAIRMAN. Would it only be for the purpose of keeping it locked up in the safe of the office, so it would not be called to the attention of the policyholders or to the State department?
  • 156 – TESTIMONY OF CARROLL E. NELSON – Actuary of the Missouri Insurance Department – Since September 1 , 1930.
    • For 5 years previous to that I was with the Missouri State Life Insurance Co., of St. Louis, Mo.

1936 – GOV (House) – Investigation of Real Estate Bondholders’ Reorganizations – Part 19

  • 1936 – GOV (House) – Investigation of Real Estate Bondholders’ Reorganizations – Part 19, Adolph J. Sabath (D-IL)   —   [BonkNote]
    • [1915p-GooglePlay] – Parts 19 and 20
      • Part 19 – (p6-946) – 1936 – November 30, December 4, 5, 9, 10, 15, 28, 29 – Chicago, ILL  —  
      • Part 20 – (p948-1906) -1936 – December 1, 2, 3, 7, 8 – Chicago, ILL 
    • House – Subcommittee of the Select Committee on Investigation of Real Estate Bondholders’ Reorganizations or Subcommittee of the Select Committee to Investigate Real Estate Bondholders’ Reorganizations
  • (p650) – Mr. TELFER. In 1929 the Modern Woodmen were actuarially insolvent – don’t ask me what that is, just accept it; it is a long story so they proceeded to rerate their policies, and in doing that they made a contract with a firm known as Frank Pearson & Co. of Chicago.
    • Well, Pearson was a transfer man-a man who transfers an old policy into a new one.
    • Your Mr. Sullivan could tell you a lot about that. 

Ambac – American Municipal Bonds Corp.

  • [2008 Financial Crisis]
  • Kim Shaul – FCIC – Interview
  • Surplus Notes
  • Settlements with Banks
  • ambacpolicyholders.com/
  • Lawsuits
  • 17 Ambac filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code on 8 November 2010

2011 11 – IAIS – Insurance and Financial Stability – 47p

  • 1984 0707 – NYT – Baldwin to Sell Ambac Indemnity – [link]
  • 2008 0201 – NYT – 8 Banks in Talks to Rescue Bond Insurer, By Vikas Bajaj and Julie Creswell – 
  • 2008 0202 – NYT – 8 Banks Discuss Aid for Bond Insurer – [link]
  • 2010 0325 – NYT – An A.I.G. Lesson From Wisconsin – [link]
  • 2010 0325 – Financial Times – Regulators move in on troubled Ambac – [link]
  • 2010 0326 – Financial Times – It’s official: Ambac’s CDS triggered – [link]
  • 2010 1014 – FCIC – Kim Shaul Interview – Wisconsin OIC – mp3
  • ambacpolicyholders.com/_B.style/
  • 2011 11 – IAIS – Insurance and Financial Stability – 47p
  • (p785-787) – A more significant matter was the right of national banks to engage through their subsidiaries in underwriting of municipal bond guaranty insurance. Such underwriting not only raised the substantive issue of banking and insurance but also raised a controversial jurisdictional issue between the Comptroller and the Board.
    • In January 1985, Citibank., a national bank and subsidiary of the BHC Citicorp, in a letter to the OCC proposed the establishment of a new operating subsidiary,281 American Municipal Bond Assurance Corporation (AMBAC) for the purpose of issuing “standby letters of credit” for municipal bonds.
    • Municipalities issuing bonds would apply for AMBAC insurance and, if there were a default thereon, the bondholders would apply to AMBAC for payment of interest and principal due.
      • The Citibank reasoned in its proposal that this activity was not insurance but standby letters of credit, a long standing permissible banking activity.
      • In May 1985, the Comptroller approved Citibank’s proposal, agreeing that this was not insurance.282
  • In immediate response to this bombshell, the American Insurance Association (AIA) filed suit in the D.C. District Court.
    • The AIA raised several issues including the contention that the proposed activity was insurance and, furthermore, that this activity was prohibited under the BHCA as amended by the Garn-St Germain Act.283
    • The court granted summary judgment in favor of the Comptroller, holding that the guarantee insurance offered by AMBAC was not insurance but the functional equivalent to providing standby letters of credit.284
  • In American Insurance Association v. Clarke,286 in which the AIA appealed the decision, the D.C. Circuit Court in effect overturned the Comptroller and the district court.
    • The court did agree with the OCC that the guarantee insurance was analogous to standby letters of credit and, as such, permissible under the National Bank Act.
    • However…

1992 – LR – Banking and Insurance – Should Ever the Twain Meet?, by Emeric Fischer – 101p

  • This conclusion is based on an analysis of Federal Reserve Board orders involving applications by Citicorp 16 and Merchants National Corp. 17 to engage in insurance activities through state-chartered banks, as well as from an overview of the District of Columbia Circuit Court of Appeal’s AMBAC decision and the Federal Reserve Board’s proposed regulatory response.19

1990 – LR – Dual Banking and State Bank Insurance Powers: Diversifying Financial Services Through the Back Door, by Michael E. Schrader – 21p

  • 2008 0202 – NYT – 8 Banks Discuss Aid for Bond Insurer – [link]
    • The insurers’ problems also raise questions about how closely the companies were supervised in recent years when they insured tens of billions of dollars of complex investments tied to risky mortgages and consumer loans.
    • Ambac is in more dire financial straits than its larger rival, MBIA, which has raised $1.5 billion in recent weeks.
    • MBIA and Financial Guaranty are regulated in New York by Mr. Dinallo’s office.
    • Ambac is regulated in Wisconsin.
      • The insurance commissioner for that state, Sean Dilweg, said on Friday that he was confident that the company was in sound financial health but was working with the company “as it develops and implements its business plan in response to the current market conditions.”
      • “For the protection of policyholders, Wisconsin has substantial financial requirements pertaining to municipal bond insurers,” he said in a statement. “Ambac meets and exceeds all these statutory requirements.”
  • 2010 0325 – Financial Times – Regulators move in on troubled Ambac – [link]
    • Sean Dilweg, the Wisconsin Insurance Commissioner, said Ambac had suspended payments on policies guaranteeing $35bn of mortgage-backed securities such as CDOs, including $120m of payments that were due in March.
      • He said that in 2009 Ambac made payments worth $1.4bn on soured mortgage-backed debts, highlighting that many investors were still relying on the bond insurer’s payments in spite of its fragile finances.
      • “When I determined that Ambac was financially hazardous I was unable to allow policyholders to receive 100 cents on the dollar,” Mr Dilweg said.
        • He added that Ambac has $230bn of insured assets in the public finance markets and these policyholders would have continued coverage.
  •  
  • Ambac v Countrywide and Bank of America –
    • BRIEF OF AMICUS CURIAE THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION IN SUPPORT OF DEFENDANTS-RESPONDENTS’ CROSS-APPEAL – 47p
    • BRIEF OF THE CHAMBER OF COMMERCE OF THE UNITED STATES AND THE ASSOCIATION OF CORPORATE COUNSEL AS AMICI CURIAE IN SUPPORT.OF DEFENDANT-RESPONDENT – 23p
  •  1972 0117 – Time Magazine – Insurance: Karl the Magic Man – [link]
    • By now, too, Karl has expanded far beyond his original business; in the past five years he has started subsidiaries that insure commercial leases for small businessmen and municipal bonds issued by small communities.
    • AMBAC, MGIC
  • Wikipedia –  MGIC_Investment_Corporation – [link] – Snippets
  • 1957, the company was founded in Milwaukee by Max H. Karl, a real estate attorney
  • 1982, Karl sold the company to Baldwin United for $1.2 billion.
    • 1985 MGIC was liquidated and its assets sold to Northwestern Mutual for $775 million.[6]
  • That same year, Karl and others set up a new company with the same name.[2]
    • In 1987, Bill Lacy was appointed chairman and chief executive officer of the company. Lacy died in 2016.[7]
    • In 1995, the founder of the company, Max H. Karl, died.[2]
  • In 1985, Citibank (the principal subsidiary of Citicorp) acquired majority control of Ambac Inc., parent company of AMBAC.
    • Other investors, including Xerox Corp., Ambac management, and Stephens Inc., an investment banking firm, held the remaining equity.

Municipal Bonds

  • 2008 0312 – GOV (House) – Municipal Bond Turmoil: Impact On Cities, Towns, And States – [PDF-262p, VIDEO-?]
  • 2012 0815 – FRB-NY – The Untold Story of Municipal Bond Defaults – [link]
  • 2021 0709 – Moody’s – US municipal bond defaults and recoveries, 1970-2020 – 113p
  • An interesting question arising in third-party guaranteed defaults is what happens when the guarantor collapses?
  • When the letter-of-credit bank or insurance company goes under, or the corporate guarantor goes bankrupt, there is no more credit enhancement or guarantee on the bond issue.
    • In these instances bondholders usually lose.
  • Such was the case with the $1.6 billion of munis backed by Executive Life and the $600 million of housing issues backed by Mutual Benefit Life Insurance Company.  (p150)

— C. Richard Lehmann, President – Bond Investors Association From 1994 “The Handbook of Municipal Bonds” CHAPTER 33: Municipal Bond Defaults

1995 0726 and 0727 – GOV (House) – Debt Issuance and Investment Practices of State and Local Governments, Richard Baker (R-LA) – [PDF-1011p-GooglePlay]

 

Bonds

  • NAIC – Troubled Company Working Group of the Examination Oversight (EX4) Task Force
    • 1990-2, NAIC Proceedings
      • Chair – Norman Koefoed, Chair (Ill);
      • (p ) – The Chair notified the task force that a Non-Investment Bonds Working Group had been appointed to review companies with large holdings in non-investment grade bonds.
  • 1989 – SOA – The Risk of Asset Default Report of the Society of Actuaries C-1 Risk Task Force of the Committee on Valuation and Related Areas, by Irwin T. Vanderhoof, Faye Albert, Aaron Tenenbein, And Ralph Verni, tsa89v4116 – Society of Actuaries – 46p
    • This paper summarizes default experience on bonds from 1900 through 1987.
    • Although the information is more extensive for publicly traded bonds, the paper includes some information on private placements, some of which is not otherwise available.
    • It should constitute an appropriate reference for defaults and default losses.
  • The National Association of Bond Lawyers
    • The Bond Lawyer – The Journal of the National Association of Bond Lawyers
    • 2000 0301 – The Bond Lawyer – 34p
      • Task Force on Financial Products of the Future. – John Cross of Hawkins, Delafield chairs this task force, with Arthur Miller of Goldman Sachs serving as Vice-Chair. The Task Force hopes to publish recommendations regarding financial products to enhance the municipal market. 

Junk Bonds – Media

 

Executive-Life-Junk-Bonds-The_Los_Angeles_Times_Fri__Apr_12__1991_-scaled

1991-Junk-Bonds- Lincoln_Journal_Star_Thu__Sep_19__1991_ 1991-Junk-Bonds- Lincoln_Journal_Star_Thu__Sep_19__1991_