The Wall Street Journal-20080216-breakingviews-com - Financial Insight- At Spitzer-s Next Stand- Banks- Others Face Billions In Losses Under Bond Plan- Legal Resistance Poses Risk

Return to: The_Wall_Street_Journal-20080216

breakingviews.com / Financial Insight: At Spitzer's Next Stand; Banks, Others Face Billions In Losses Under Bond Plan; Legal Resistance Poses Risk

Full Text (659  words)

Eliot Spitzer has few fans on Wall Street. The New York governor, back when he was the state's attorney general, forced brokers and fund managers to pony up nearly $2.5 billion to settle lawsuits over research conflicts and late trading. But that will look like chump change compared with the losses Mr. Spitzer's plan for bond insurers could cause.

Mr. Spitzer and his insurance commissioner, Eric Dinallo, want bond insurers to separate their safe muni-bond exposures from riskier policies covering dodgy mortgage bonds, collateralized debt obligations and other structured-finance investments. One insurer, FGIC, reportedly wants to do so.

But Mr. Spitzer's plan would batter banks or investors holding insured mortgage bonds or CDOs. Look at FGIC. It backs about $95 billion worth of nonmunicipal securities. Big chunks of that are mortgage bonds -- some backed by subprime mortgages -- and CDOs.

If FGIC separates its low-risk muni-bond policies from those covering riskier securities, the latter portfolio may not be able to cover all its potential losses, unless FGIC drums up a lot more capital. Since it hasn't been able to do that for its combined portfolio, this looks like a long shot.

With loss assumptions on subprime mortgage bonds running upward of 20%, and a liquidity freeze battering CDO prices overall, there's a good chance those FGIC-backed securities would fall sharply in value, possibly by tens of billions of dollars.

What can banks and investors facing those losses do? Well, some lawyers think suits based on the concept of fraudulent conveyance -- where assets pledged to one party are fraudulently shifted to benefit another -- might stop the bond insurers from splitting themselves up.

But there's Mr. Spitzer's mastery of spin to consider. He has assumed the role of noble defender of taxpayers and muni-bond investors. Whatever legal gambits Wall Street tries, it will need to step carefully to avoid the sort of public-relations nightmares it suffered when clashing with its scourge in the past.

Better Best Buy

Best Buy has fared better than most retailers during the recent consumer funk. But now, the $18.5 billion electronics retailer is trimming its outlook for the year ahead. That's hardly good news for shareholders, but there may be a silver lining. It is better positioned than its rivals.

Selling expensive gadgets in an economy on the brink of recession is tough. But Best Buy has been able to buck the trend by offering a better selection and shopping experience for those who still have cash to spend. That's helped buoy its share price. Best Buy stock has gained ground over the past six months, while S&P's retail index is off more than 10%.

But the year ahead looks challenging. Best Buy's same-store sales grew in December, albeit at an anemic 1.5% pace. With slower store traffic in January, it's now predicting a decline in comparable sales for its fiscal fourth quarter, which ends March 1.

That is obviously disappointing for shareholders, but it could be even worse news for its competitors. Unlike apparel or other goods, it's hard to trade down in consumer electronics. A customer who can't afford a plasma-screen TV at Best Buy probably isn't going to buy one at Circuit City Stores or RadioShack either. Indeed, Best Buy has been steadily gaining market share.

That should put Best Buy in a better position to sell its electronic wares when Uncle Sam's tax-rebate checks arrive later this year. Furthermore, while Best Buy may be trimming its earnings forecast, it's not pulling back on expansion, and expects to open as many as 100 new stores in the U.S. and as many as 50 in Canada, China and Mexico.

Best Buy may not be able to avoid short-term pressure on its share price, but it remains better placed to invest for the eventual rebound. It isn't clear that other retailers can say the same.

-- Dwight Cass and John Christy

---

This column is by breakingviews.com, an online financial commentary site.