State probes bond insurer

The Baltimore Sun

The troubled bond insurer ACA Financial Guaranty Corp. has agreed to give the Maryland Insurance Administration far-reaching authority in running the company's operations, and could be forced to turn over control of the company to the state regulator.

ACA must seek the agency's approval before paying dividends or engaging in major transactions, the company said in a filing with the Securities and Exchange Commission late Wednesday.

The state insurance agency, which regulates New York-based ACA because it's incorporated in Maryland, could put the company into receivership if it decides it is insolvent.

The agency has started a detailed financial examination of ACA and put a team of examiners in New York to determine the extent of the company's exposure to defaults in the subprime mortgage market.

The financial cloud over ACA, once part of Baltimore's USF&G; Financial, demonstrates the extent to which the subprime mortgage contagion has spread.

What began with borrowers unable to make mortgage payments has led to defaults on bonds backed by those mortgages. Now with problems spreading to a company that insures those bonds, the credit mess could hamper other bond insurers as well as bond issuers. For state and local governments, the turmoil could make it more expensive to raise money for projects such as water and sewer facilities.

ACA has insured about $26 billion in mortgage-related securities. It became the only bond insurer to be downgraded below investment grade by the Standard & Poor's rating agency, which gave it a junk rating last week.

ACA is currently trying to work out agreements with clients who have demanded that it post $2 billion in collateral against its insurance contracts. Those clients have given the company until Jan. 18 to comply.

Donald Light, an insurance industry analyst at Celent LLC, said the arrangement with Maryland regulators gives ACA time to raise capital. "They have to find somebody with a pretty big available set of assets that they are willing to invest in ACA," he said. "Whether they can find that kind of investor is an open question."

ACA officials didn't return calls seeking comment.

ACA was spun off from USF&G;, which was sold in 1998.

The company, now a unit of ACA Capital, doesn't have any offices or employees in Maryland but remains under the authority of state regulators. For years ACA focused on the relatively staid business of insuring municipal bonds, but it expanded in 2004 into insuring collateralized debt obligations (CDOs) and other more risky securities.

Michael Greenberger, a law professor at the University of Maryland and a former securities regulator, said he met with the Maryland Insurance Administration in September to raise alarms about ACA's business.

"CDOs are the biggest problem we face, even more than home loans going bad," Greenberger said. "All sorts of financial institutions believed they were stable bonds that were insured but their value was assessed using blue smoke and mirrors."

Lester C. Schott, associate commissioner at the state insurance agency, said the regulator had been tracking developments at ACA for months. In November the company reported a quarterly loss of $1 billion, primarily because of the subprime crisis. Then S&P; warned last month that it might downgrade ACA.

But the company had been able to meet all of its financial obligations, Schott said, until S&P;'s decision to actually downgrade triggered the collateral demand from clients.

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