New York partner Andrew Lorin was quoted in Law 360 regarding New York Department of Financial Services’ (DFS) move toward a historic takeover of troubled bond insurer Financial Guaranty Insurance Co. (FGIC). If takeover is approved, it would be the first time New York has put a financial guaranty insurance company into receivership.
DFS has said it intends to devise a rehabilitation plan that is fair to FGIC's policyholders and other creditors; however, the insurance regulator is concurrently fighting off claims that it let bond insurer MBIA Inc. favor municipal bond policyholders at the expense of its structured finance policyholders.
Andrew noted that, until recently, it had been relatively rare for financial guaranty companies to face financial troubles, as these insurers had stuck to the business of insuring municipal bonds, and municipalities don't generally default on their bonds.
"Companies like FGIC that for years had been just doing the plain old business of wrapping municipal bonds decided to expand their business and start wrapping these exotic financial products, thinking that they properly understood the risks," he said.
And despite all the speculation over how the regulator will treat policyholders, there is still a more basic question of whether DFS will even be able to rehabilitate FGIC, or if it will have to put the company into liquidation, according to Andrew.
"It's possible that the company is so far gone that the superintendent will ultimately determine that there is no possibility of rehabilitation," he said.
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