FGIC Sees No Need to Honor Agreement With IKB, Calyon

In a dust-up that has deep implications for the tangled web of credit derivatives holding the financial system together, FGIC is trying to get out of insuring CDOs bought from IKB by Credit Agricole. And it may have a point:

The disputed FGIC transaction was part of a series of deals in which Caylon agreed to buy CDOs from IKB's off-balance-sheet Rhineland fund if requested, with both FGIC and IKB providing credit guarantees if that happened, according to FGIC's complaint. The deal followed a similar arrangement involving IKB, Ambac Financial Group Inc. and a ``European bank,'' it said.

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FGIC ``has no further obligation'' because certain responsibilities weren't met and IKB, the German bank that's had to be bailed out four times since July, misrepresented its condition, the insurer said in a statement today. The three companies are fighting the matter in courts. If FGIC wins, the benefit ``could be material,'' the New York-based company said.

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The contracts involved in FGIC's dispute include those that accounted for 75 percent of its loss reserves at the end of 2007, the company said. Fitch Ratings, which today lowered the company's insurance units to BBB from AA, said potential losses account for a ``material percentage'' of what it's projecting for FGIC, and that the tussle may take ``several years'' to settle.

We like the way our informant summarized this clusterf---:

Let me get a grip on this one...IKB's SIV "Rhineland" bought a CDO by issuing CP. IKB then bought a Put option from Caylon on the CDO, and Caylon bought a Call on insurance for the CDO from FGIC to insure the deal? So then Rhineland doesn't roll its CP, and has to dump the CDO, so it exercises its Put to Caylon, who in turn exercises its call on the insurance... But FGIC feels like it was lied to about the likelihood of Rhineland collapsing, and claims its insurance is void? So if FGIC defaults then who is the proud new owner of the CDO??? I just confused myself. Must stop. Nevertheless, the CDO now has its underlying credit quality and this ripples all the way up the chain. Point here is, THEY AIN'T GOT NO MONEY. Neither do ABK and MBIA.

Expect more of this; things are getting real nasty as banks and insurers are scrambling for cash.