Loan Modification

While the filings by the State of Wisconsin seem well thought out, the fact remains that the logic of discriminating against the RMBS holders starts with the decision to pay out Citigroup and other large banks on the CDS positions. The dirty little secret revealed by the actions of the State of Wisconsin in the AAC case is that the insurance industry and captive regulators are giving equal treatment to CDS and some traditional insurance contracts, while discriminating against other financial claims. This situation reeks of hypocrisy and conflict of interest. Did we mention that BlackRock did the analysis supporting the State of Wisconsin affidavit.

The whole point of treating insurance as a special, state-law industry not subject to the UCC was to give regulators the power to void non-policy related financial liabilities and put the true insured parties first in line. This gets to the question posed to the G-30 back in the summer of 2007, are the global banking and insurance industries at risk to each other. They concluded that all was well, remain calm. Ha! What AFG illustrates is that the financial system is literally one event of default away from a global meltdown.

...

More important, the actions of the State of Wisconsin with respect to AAC are, to us, a transparent effort to sidestep the insurance commitments to RMBS holders in favor of honoring contracts to guarantee CDS that flow through some well-connected global banks. This is AIG all over again and we think that the Court and the State of Wisconsin need to understand if Mr. Dilweg has become, wittingly or no, the puppet of Timothy Geithner, his political master and former C director Robert Rubin, and all of the large banks involved.