Real Estate Lender Implosion

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Bear Stearns, Merrill in Talks to Rescue ACA Capital, NYT Says

By Ryan Flinn

Dec. 19 (Bloomberg) -- Bear Stearns Cos. and Merrill Lynch & Co. are among several major banks in talks to bail out ACA Capital Holdings (ACAH), a bond insurance company that has guaranteed $26 billion in mortgage securities, the New York Times reported, citing two people familiar with the situation.

ACA Capital Holdings has been told by Standard & Poor's that its financial guarantor subsidiary, ACA Financial Guaranty Corp., may lose its A rating, according to the Times.

If the unit is downgraded the banks that insured securities with it would have to take back billions in losses from ACA, as part of their credit protection agreement, the Times said.

Another option discussed by the banks would be to relieve the insurer of the obligation to post collateral for its insurance contracts following a downgrade, the Times reported.

ACA didn't return calls made by the New York Times and an unidentified Merrill spokeswoman wouldn't comment; a Bear Stearns spokesman said the bank was a very small creditor at ACA, the Times said.

Merrill Lynch is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.

To contact the reporter on this story: Ryan Flinn in San Francisco at [e-mail]

Last Updated: December 19, 2007 02:03 EST