Yves Smith notes that monoliner bond insurer MBIA, after raising over a billion dollars through an equity offering, is refusing to transfer the proceeds from its holding company to its insurance subsidiary.

It appears that they are doing this because senior executives are paid by the holding company, and not the insurers.

One wonders then, why regulators, in this case Eric Dinallo, the New York State insurance commissioner, aren’t doing something about this, and the answer is blackmail:

The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns. Now these financial instruments are taking center stage in another Wall Street drama: whether regulators will let MBIA, the big bond insurance company, renege on a promise to shore up a crucial unit with $900 million in capital.

MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.

But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.

As the old saying goes, “If you owe the bank $1000, the bank owns you. But if you owe the bank $1,000,000, you own the bank.”

I’m thinking that perhaps a better solution for New York State regulators might be to find a way to arrest senior management at MBIA, as it appears that their capital raising was clearly fraudulent.