It all started when the mortgage business made the bigtime and credit default swaps became the financial world's latest gimmick for speculating on market directions. Lots of hedge funds (and lots of managers with lots of money making opportunities) later, MBIA, the bond insurance and investment management company that claims on its website that its "core business is credit enhancement", is reneging on its promise to put $900 million in an insurance subsidiary to shore up its capital, as agreed back in May (the $900 million would be in the subsidiary in 30 days, it told New York regulators on May 12). It expects to get by with it, because of credit default swaps that would cause real problems for the credit markets if it is treated as defaulting. Sounds like financial blackmail to me.
Regretably, that is where the Fed has gotten us with the "too big to fail" logic that saved Bear Stearns and led every other unregulated financial institution to think that they can have their pie (risky investments, putting money where managers make the most money, etc.) and eat it too (counting on the Fed to bail them out if their risky investments don't pan out).
Here's a little of what is being said about MBIA's reneging on its deal.
- Naked Capitalism, MBIA Refuses to Downstream Cash and Has the Fed Compromised its Independence
- New York Times, Gretchen Morgenson, MBIA Debt is Setting Up a Quandary
- Calculated Risk, MBIA Letter to Shareholders
By the way, the letter to MBIA shareholders is the main item that pops up on the website link, above. You'll note that one of the things that the company is promising is to "level the US playing field or restructure with reinsurance affiliates"--I take it that means it plans to create offshore insurance affiliates and use transfer pricing to avoid US tax (while keeping its new investors' money "safe" by not using it in the old insurance subsidiary to shore up any losses there). Am I reading this right? MBIA is avoiding its obligations to shore up the insurance subsidiary, planning to use the money instead to create an offshore insurance subsidiary, where it probably plans to use fancy pricing and other transfer pricing gimmicks to pay less to the US government, even while it and other financial institutions are counting on government regulators not pursuing regulatory action against them to get them to comply with their promises made on capital reserves because they are "too big to fail" and it would have repercussions for the crazy, speculative financial system they've set up for huge profits for themselves that, because it is a crazy speculative financial system that favors big money which favors risk, will tend to take risky positions that will tend to make it necessary for heavy infusions of government support....
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