Saving the bond insurers: 5 fixes for the crisis

Just about everyone seems to have an idea on how to fix the troubled bond insurers and stave off a crisis that threatens to send the financial services sector into disarray.

The plan: When testifying before Congress last week, New York Gov. Eliot Sptizer and State Insurance Superintendent Eric Dinallo told lawmakers that the best solution would be to recapitalize the bond insurers. If that failed, they would break up these firms into a "good bank" that would manage their healthy municipal bond insurance business, and a "bad bank" to oversee the smaller structured finance arm. Each division would remain part of a holding company.

The prospects: Likely. Of all the different solutions being floated, this proposal has garnered the most interest. After the bond insurer FGIC was downgraded last week by Moody's, the company asked Dinallo's office for permission to break itself up. Its larger rivals Ambac and MBIA are also reportedly considering similar moves.

A break-up would prevent cities and towns - which buy insurance on bonds they sell to raise money for projects like roads, schools and bridges - from getting saddled with higher borrowing costs. But it is widely believed that, after a split, the structured finance arm would wither and die, meaning downgrades on the asset-backed securities issued by Wall Street and more writedowns.
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