NEW YORK - New York State is seeking to take control of bond insurer Financial Guaranty Insurance Co.
With FGIC’s cooperation, Benjamin Lawsky, New York superintendent of financial services, on Monday applied to take control of FGIC. Specifically, he applied for an Article 74 rehabilitation proceeding at the New York Supreme Court in New York County.
Responding to the application, Judge Doris Ling-Cohan ordered FGIC to appear at a hearing on June 28, 2012 and show cause why a rehabilitation order should not be entered “(i) appointing the superintendent and his successors in office as rehabilitator of FGIC; (ii) directing the rehabilitator to take possession of the property and assets of FGIC and to conduct the business thereof; and (iii) directing the rehabilitator to take such steps toward the removal of the causes and conditions which have made this rehabilitation proceeding necessary,” according to a court document.
The FGIC board of directors technically remains in control of the insurer until the court approves Lawsky as rehabilitator. However, the court has barred them from transacting FGIC business.
Before the most recent recession, FGIC was a major insurer of municipal bonds. However, it stopped writing new insurance in January 2008 after experiencing unexpected large losses on residential mortgage-backed securities it insured.
In the third quarter of 2009 FGIC reported an impairment on its required minimum surplus to policyholders of $932 million. In November 2009 the New York State Department of Financial Services ordered FGIC to suspend paying claims.
“FGIC was subsequently unable to eliminate the impairment of its policyholders’ surplus through an out-of-court surplus restoration plan,” the company reported. “Therefore, the superintendent has determined that it is necessary to place FGIC into rehabilitation.”
The rehabilitation is not a liquidation.
“The superintendent, following his appointment as rehabilitator, intends to file a plan of rehabilitation in the rehabilitation proceeding that will provide fair and equitable treatment of FGIC’s policyholders and other creditors,” the company reported. “Such plan will govern the timing, amount, and manner of payment of claims.”