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Bond insurers surge on hopes for bailout

Counterparties meet regulators in New York; $15 bln plan reportedly proposed

By Alistair Barr, MarketWatch
Last update: 5:32 p.m. EST Jan. 23, 2008

SAN FRANCISCO (MarketWatch) -- Shares of bond insurers surged on Wednesday, adding fuel to a major late-session rally in the U.S. stock market, on hopes that a bailout package orchestrated by regulators will rescue the ailing industry.

Big banks and brokers that are counterparties to bond insurers met with Eric Dinallo, New York's state insurance regulator, said David Neustadt, a spokesman for the agency. He declined to say what was discussed, but reiterated the regulator's goal of restoring stability and injecting more capital into the $2.3 trillion market.

During afternoon trading, the Financial Times reported that Dinallo pressed the banks to provide $5 billion in immediate capital to support the bond insurers and to ultimately commit up to $15 billion. Neutstadt declined to comment on the report.

Ambac Financial (ABK 13.70, +5.73, +71.9%) , one of the largest bond insurers, saw its stock leap 72% to close at $13.70. Shares of MBIA Inc. (MBI 16.61, +4.08, +32.6%) , a rival, jumped 33% to $16.61.
Smaller bond insurers also rallied strongly. Security Capital Assurance (SCA 3.79, +1.64, +76.3%) gained 76% to close at $3.79 and ACA Capital (ACAH 0.85, +0.25, +41.7%) advanced 42% to 85 cents.

At issue is an industry whose trials in recent weeks have significantly added to investor anxiety about the collapse of mortgage-related assets.

Bond insurers have been under intense pressure amid mounting concerns that mortgage-related losses will undermine their business models. Fitch Ratings cut New York-based Ambac's crucial AAA rating last week, and rival ratings agencies have warned they may have to do the same.

The stakes remain high because bond insurers are so intertwined with the rest of the financial markets. The companies guarantee billions of dollars of complex mortgage-related securities held by some of the world's largest investment banks and back more than $1 trillion of muni bonds.

In light of the widespread damage that might be inflicted by the collapse of a major bond insurer, regulators have begun working to avoid such an outcome.

Ambac "is in desperate need of $5 billion or more of capital or a guarantee from a very strong (backer) to preserve market confidence," said Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers. "Some sophisticated investors claim that Ambac and MBIA must be saved or the write-downs and margin postings will be debilitating to most investment and commercial banks."

Some investors have also shown interest in the sector.
Wilbur Ross, highly successful as an investor in so-called distressed businesses, said on Tuesday that he wants to invest in some bond-insurance companies and could pick a candidate within the next week.

Also Tuesday, Ambac's interim chief executive, Michael Callen, said the company's considering strategic alternatives. He said the company is talking with "very credible" parties and "pools of capital."

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