Regulation: Good cop, bad cop
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Regulation: Good cop, bad cop

Tough talk by the regulators might bear fruit for the monolines.

When superintendent of insurance for New York Eric Dinallo first proposed a rescue plan for the monoline guarantee companies this was viewed by many in the market as a much-needed piece of good news. At last someone was prepared to do something proactive to sort out the mess that these firms have found themselves in. But the regulator’s approach seemed to have moved from carrot to stick when the financial market’s favourite bogeyman, New York governor Eliot Spitzer, subsequently announced that the firms had just five business days to raise fresh capital or face being broken up.

Spitzer’s move must have been designed to try to bounce the banks into action. And on February 23, when news broke of a potential $3 billion capital injection for Ambac from Citi, UBS, RBS, Wachovia, Barclays, SocGen, BNP Paribas and Dresdner Bank, it looked as if the good cop/bad cop approach might have paid off. The preferred route for all concerned is to have the monolines recapitalized by the banks, and the suggestion that they should be split along good bank/bad bank lines must be something that the latter should be very keen to avoid.

The reason for this is stark.

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