Bond insurer MBIA Inc. is finally splitting off its public finance-only insurance company from the private bond insurance business which led to huge losses and beat the stock down 72% over the past year.
Moody’s cut the ratings on MBIA’s debt to junk status last year. This basically wiped out MBIA’s municipal insurance business since its not much use in buying insurance from a junk rated company. Last year, many were questioning whether the entire model of municipal insurance made sense, given that munis rarely defaulted and the bond insurers were so troubled.
Now, however, we’re in a very different environment. States and cities are facing increased credit costs as they are viewed as more likely to default. They could certainly use some insurance to bring down borrowing costs. Unfortunately, most insurers had already wrecked themselves upon the dangerous shores of credit default swaps and other risky insuranceproducts.
The move today seems to be an attempt by MBIA to create a ring-fenced muni insurance company that won’t be exposed to the problems in the private bond insurance market. The new spin off will operate separently, and its revenues won’t be used to subsidized the wreckage of the broken bond insurance business.
This kind of division was often called for last year, with some comparing it to a good bank/bad bank model. But Chief Executive Jay Brown, who announced the split in a letter to shareholders today, says that’s the wrong way of looking at it. Rather, its just the division of the (bad) structured-finance business line and the (good) public-finance line. See? Totally different.