Spitzer Woes Not Likely to Hurt Bond Insurers

NEW YORK (Reuters) – Allegations of Eliot Spitzer‘sinvolvement with a prostitution ring should probably have only a modestimpact on bond insurers’ restructuring efforts because the New Yorkgovernor’s troubles have surfaced late enough in the process.

Spitzer has been a key force behind capital-raising andrestructuring for bond insurers. These mostly New York-based companies,which guarantee more than $2.4 trillion of debt, could face billions ofdollars of payouts after backing repackaged subprime mortgage bonds andother risky debt.

"He’s been behind the whole process of getting the New Yorkinsurance commissioner to come to a solution quickly for the insurers,"said Dan Fuss, vice chairman of investment company Loomis Sayles.

But much of the recapitalizing and restructuring process is over fornow, after Ambac Financial Group Inc, the second-largest U.S. bondinsurer, sold $1.5 billion of equity and convertibles last week.

And the biggest regulatory force involved with day-to-daydiscussions among the insurers, banks and others has been New YorkInsurance Superintendent Eric Dinallo, whom Spitzer appointed.

The New York Times reported on Monday that Spitzer was caught on afederal wiretap arranging to meet a prostitute. The Times and The WallStreet Journal said on Tuesday that he was likely to resign.

"Spitzer’s issues erode Dinallo’s authority ever so slightly," saidJames Ellman, portfolio manager at hedge fund Seacliff Capital.

Requesting anonymity, another hedge fund manager said: "I’m sureDinallo’s going to do the same things now that he would have donebefore."

Dinallo’s office declined to comment.

At this point, New York insurance regulators are focusing onrestructuring FGIC Corp, a source familiar with the matter said. Thecompany recently told regulators it wanted to split its low-riskmunicipal bond insurance business from its higher-risk structuredfinance insurance operation.

FGIC, the fourth-largest bond insurer, is owned by a consortium thatincludes private equity firm Blackstone Inc., which said on Monday thatit had written down the value of its stake in the company to a fewcents on the dollar.

An FGIC spokesman declined to comment.

To be sure, bond insurers may have to raise more capital in thefuture, but analysts said that whoever is governor then will also havegood reason to try to fix the companies’ problems.

(Additional reporting by Jennifer Ablan; Editing by Lisa Von Ahn)