Sptizer's plan will batter banks

--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.