Regulators coerce big banks to bail out bond insurers

Banks Pressed to Bail Out Bond Insurers

By Ben White and Aline Van Duyn
Financial Times, London
Thursday, January 24, 2008

http://www.ft.com/cms/s/0/ac60d522-ca20-11dc-b5dc-000077b07658.html

The largest US banks are under pressure from New York State insurance regulators to provide as much as $15 billion (L7.6 billion) in fresh capital to support struggling bond insurers, people familiar with the matter said.

Eric Dinallo, New York insurance superintendent, has met executives at the banks and urged them to provide $5 billion in immediate capital to support bond insurers, the largest of which are MBIA and Ambac, and ultimately to commit up to $15 billion. A spokesman for Mr Dinallo had no immediate comment.

Concerns about the future of MBIA and Ambac grew last week when Fitch Ratings downgraded Ambac from triple-A status to double-A. The business model of both companies depends on their having a top level credit rating.

Share prices for both Ambac and MBIA rose on Wednesday by more than 10 per cent amid rising hopes for a capital injection.

People familiar with the matter said details that contributions to a bailout fund would not necessarily be based on individual bank's exposure to the insurers, known as monolines.

It was unclear to what extent federal officials were involved in the discussions but the health of the monolines has been a top priority of regulators at the US Treasury and Federal Reserve.

Banks such as Merrill Lynch, Citigroup, and others have been forced to write down the value of insurance they took out on mortgage-backed securities they hold on their balance sheets.

There is widespread concern that more rating agency downgrades of the monolines could force a fresh round of writedowns, which could in turn further damage already battered investor confidence.

However, Mr Dinallo's plan has not met with uniform support among banks that have their own capital-raising issues following the collapse in value of mortgage-related securities. One industry source said some banks would prefer to see the federal government co-ordinate a rescue plan for the monolines.

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.