Opinion ID: 2366732
Heading Depth: 1
Heading Rank: 2

Heading: FGIC Corporation

Text: In 2003, a consortium of investors that included Blackstone purchased an 88% interest in FGIC Corp. (FGIC), a monoline financial guarantor, from General Electric Co. for $1.86 billion. FGIC is the parent company of Financial Guaranty, which primarily provides insurance for bonds. Although municipal bond insurance traditionally constituted the majority of Financial Guaranty's business, in the years leading up to Blackstone's IPO it began writing insurance on collateralized debt obligations (CDOs), [2] including CDOs backed by sub-prime mortgages to higher-risk borrowers. Financial Guaranty also began writing insurance on residential mortgage-backed securities (RMBSs) [3] linked to non-prime and sub-prime mortgages. This insurance on RMBSs and CDOs was in the form of credit default swaps (CDSs). [4] By the summer of 2007, FGIC, as a result of Financial Guaranty's underwriting practices, was exposed to billions of dollars in non-prime mortgages, with its total CDS exposure close to $13 billion. From mid-2004 through mid-2007, factors including rising interest rates, the adjustment of interest rates on sub-prime mortgages, and a substantial slowing of property-value appreciation (and in some markets, property-value depreciation) caused many borrowers to be unable to refinance their existing loans when they could not meet their payment obligations. As a result, beginning in 2005, there was a significant increase in mortgage-default rates, particularly for sub-prime mortgage loans. By early 2007, before the IPO, some of the top mortgage lenders with sub-prime mortgage exposure began revealing large losses and warned of future market losses. All of these symptoms, plaintiffs allege, provided a strong indication that the problems plaguing sub-prime lenders would generate substantial losses for FGIC on the CDSs it issued to its counterparties. This likelihood was allegedly exacerbated because, in many instances, FGIC's CDS-counterparties were able to demand accelerated payments from FGIC even before a default event occurred on the underlying referenced assets. Blackstone's 23% equity interest in FGIC was worth approximately $331 million at the time of the IPO. Plaintiffs allege that, due to this significant interest, Blackstone was required to disclose the then-known trends, events, or uncertainties related to FGIC's business that were reasonably likely to cause Blackstone's financial information not to be indicative of future operating results. Following the IPO, in a March 10, 2008 press release, Blackstone announced its full-year and fourth-quarter 2007 earnings. The company's Corporate Private Equity segment reported 2007 revenues of $821.3 million, down 18% from 2006 revenues. Most significantly, Blackstone reduced the value of its portfolio investment in [FGIC], . . . which accounted for $122.2 million, or 69%, of the decline in revenues for the year. Blackstone reported that its Corporate Private Equity fourth quarter revenues of ($15.4) million were negative, as compared with revenues of $533.8 million for the fourth quarter of 2006, a change driven primarily by decreases in the value of Blackstone's portfolio investment in [FGIC] . . . and lower net appreciation of portfolio investments in other sectors as compared with the prior year.