Stocks: BOND

Banks Step In to Shore Up Bond Insurers’ Shaky Ratings

By , Money Morning •

By Jennifer Yousfi
Managing Editor

Eight global banks have joined together to protect the credit ratings of bond insurers.  Bond insurance is a $2.3 trillion industry and a downgrade of an insurer would in effect downgrade all of the investments underwritten by the firm.

In an attempt to avoid that eventuality, New York Insurance Department Superintendent Eric Dinallo is working with eight banks: Barclays PLC (BCS), BNP Paribas (OTC:BNPQY), Citigroup Inc. (C), Allianz SE (AZ), Dresdner Bank AG, Royal Bank of Scotland Group PLC (RBS), Societe Generale (OTC:SCGLY), UBS AG (UBS) and Wachovia Corp. (WB).

Details of a plan have not yet been released.

Shares of MBIA Inc. (MBI) and Ambac Financial Group, Inc. (ABK), two of the largest U.S. bond insurers, rose in trading on news of the rescue plan. The two bond-insurance giants reported a combined $5.5 billion in subprime-related losses in the fourth quarter.

Fitch Ratings Inc. has already downgraded Ambac to “AA” from “AAA.”  Moody’s Investor Services (MCO) is currently reviewing the ratings of both companies, while Standard & Poor's is reviewing MBIA's rating, Bloomberg News reports.

The ratings are in jeopardy due to the risky structured debt vehicles the bond insurers chose to underwrite.  A high rating is important to firms such as MBIA and Ambac – without it, they will have trouble attracting new clients and, ultimately, staying in business.

“In order to retain their ‘AAA’ ratings, financial guarantors need an adequate level of capital, a risk management and underwriting framework commensurate with that capital, and a viable business plan,” Moody's said in an analyst report. “If one of these characteristics is judged by Moody's to be inadequate, we would expect to lower the rating.”

If bond insurers lose their “AAA” ratings, Oppenheimer & Co. analysts predict it could cause additional losses of $70 billion for the global banking industry, which has already had subprime related write-downs of more than $100 billion.

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