Eliot Spitzer's Demise: Some good news in Mortgage Insurance

There was some reason to rejoice on Wall Street and in the bond insurance business as well. First, AMBAC was able to raise an additional $1.5bn last week and together with MBIA, they have now recapitalized to the tune of $4bn. This is a drop in the bucket compared with the face value of the outstanding guarantees, but the companies need only pay the defaulted interest until the bonds principal is due. Since the principal on many of these mortgages will not even begin to come due for years yet (or will only come due in small amounts even then) it buys time to avoid default and to use premiums earned to offset default losses over time.

Better news, yet, however is the fact that Eliot Spitzer has resigned as NY Governor. Spitzer has been no friend to investors or the markets over the years, regularly using his position as the Attorney General of NY State to threaten firms with indictment (a corporate death sentence, just ask Arther Anderson) if they failed to meet his demands. See Spitzer's hit list.

It is pretty amazing just how unpopular this guy managed to be. He was elected in a major landslide promising an end to sleazy NY politics (which is exceeded only by that of neighboring New Jersey - my home state - and Massachucetts, 'nuff ced). A guy who uses the "wife of Caesar" standard (that one must be above reproach) this was indefensible behavior. It's even more amazing to consider the fact that Spitzer was ensnared by the very tactics that he, as prosecutor, had used.

But the good news is, it also means that he cannot pursue his crazy plan to restructure the bond market by separating the mortgage bond insurance business from the muni bond insurance business. Such a separation, while it might have preserved slightly lower rates for municipal bond issuers (like the State of NY, ahem) would have ensured default on the mortgage bond business. The best hope for preserving insurance and normal operations in both markets it to continue to allow the insurers to use the premiums earned on muni bonds (which are quite unlikely to default) to offset losses on the mortgage bonds (that are already in default and getting worse).