Spitzer woes not likely to hurt bond insurers

New York Governor Eliot Spitzer leaves with his wife Silda Wall after addressing the media at his office in New York, March 10, 2008.

NEW YORK (Reuters) - Allegations of Eliot Spitzer's involvement with a prostitution ring should probably have only a modest impact on bond insurers' restructuring efforts because the New York governor's troubles have surfaced late enough in the process.

Spitzer has been a key force behind capital-raising and restructuring for bond insurers. These mostly New York-based companies, which guarantee more than $2.4 trillion of debt, could face billions of dollars of payouts after backing repackaged subprime mortgage bonds and other risky debt.

"He's been behind the whole process of getting the New York insurance commissioner to come to a solution quickly for the insurers," said Dan Fuss, vice chairman of investment company Loomis Sayles.

But much of the recapitalizing and restructuring process is over for now, after Ambac Financial Group Inc, the second-largest U.S. bond insurer, sold $1.5 billion of equity and convertibles last week.

And the biggest regulatory force involved with day-to-day discussions among the insurers, banks and others has been New York Insurance Superintendent Eric Dinallo, whom Spitzer appointed.

The New York Times reported on Monday that Spitzer was caught on a federal wiretap arranging to meet a prostitute. The Times and The Wall Street Journal said on Tuesday that he was likely to resign.

"Spitzer's issues erode Dinallo's authority ever so slightly," said James Ellman, portfolio manager at hedge fund Seacliff Capital.

Requesting anonymity, another hedge fund manager said: "I'm sure Dinallo's going to do the same things now that he would have done before."

Dinallo's office declined to comment.

At this point, New York insurance regulators are focusing on restructuring FGIC Corp, a source familiar with the matter said. The company recently told regulators it wanted to split its low-risk municipal bond insurance business from its higher-risk structured finance insurance operation.

FGIC, the fourth-largest bond insurer, is owned by a consortium that includes private equity firm Blackstone Inc., which said on Monday that it had written down the value of its stake in the company to a few cents on the dollar.

An FGIC spokesman declined to comment.

To be sure, bond insurers may have to raise more capital in the future, but analysts said that whoever is governor then will also have good reason to try to fix the companies' problems.

(Additional reporting by Jennifer Ablan; Editing by Lisa Von Ahn)