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Bond Insurer Bailout Plan May Be `Too Late,' CreditSights Says

By John Glover

Jan. 29 (Bloomberg) -- New York Insurance Superintendent Eric Dinallo's attempt to bail out bond insurers is ``coming too late in the game' to stave off ratings downgrades, CreditSights Inc. analysts said in a report.

Dinallo wants to bolster bond insurers' capital with a $15 billion guarantee fund supported by contributions from banks and securities firms, according to the New York-based bond-research firm. Setting up the fund and gaining the backing of the banks is likely to be overtaken by events, CreditSights said today.

``Given the number of competing interests and levels of commitment of participants involved, we think it is unlikely that an agreement sponsored by Dinallo could be hammered out within the appropriate timeframe,' Rob Haines, Craig Guttenplan and Joe Di Carlo wrote. ``In the offchance that any deal could be solidified, the rating agencies are likely to have already taken action.'

Bond insurers including MBIA Inc. and Ambac Financial Group Inc., the two largest, have guaranteed about $2.4 trillion of securities issued by U.S. cities and states and bonds backed by mortgages, credit cards and other assets. The industry has been seeking capital since November when Fitch Ratings and Moody's Investors Service began reviewing the effect of rising defaults on subprime mortgage securities guaranteed by the insurers.

Dinallo's department hired investment bank Perella Weinberg Partners to advise it on the financial stability of bond insurers and how to protect their customers, the Wall Street Journal reported today, citing people familiar with the matter.

Ratings Cut

Fitch Ratings cut the AAA ranking on the financial guarantee units of Ambac in New York and Bermuda-based Security Capital Assurance Ltd. earlier this month. The ratings company is due to rule on whether Financial Guaranty Insurance Co., the fourth- largest bond insurer, has raised enough capital to preserve its AAA rating.

``We are expecting to see a downgrade of FGIC any day now,' CreditSights said.

FGIC in Stamford, Connecticut may have its ratings cut by as many as four levels to A+, according to Michael Cox, an analyst at Royal Bank of Scotland Group Plc, wrote in a report published today. The insurer's rankings may be reduced today, he wrote.

The bond insurers, which began by guaranteeing the notes sold by U.S. municipalities to fund roads and schools, stumbled as they expanded into structured finance such as collateralized debt obligations. CDOs repackage pools of bonds, loans and credit-default swaps and slice them into separate pieces of varying risk and return.

Lower ratings for the insurers may cause a new round of writedowns on debt holdings at the world's financial companies, potentially forcing banks to raise another $143 billion to bolster capital, analysts at Barclays Capital said last week.

Credit Writedowns

Merrill Lynch & Co. wrote down $1.9 billion of securities and Canadian Imperial Bank of Commerce had to sell more than C$2.75 billion ($2.7 billion) in stock to cover losses after the credit rating of ACA Capital Holdings Inc.'s financial guaranty business was cut 12 levels to CCC by S&P.

Ratings cuts for other bond insurers will be ``much, much smaller than those for ACA, given their stronger starting capital position,' Bank of America Corp. analysts led by Jeffrey Rosenberg wrote in a report yesterday.

Saving the bond insurers ``will ultimately require a broader multi-faceted regulatory response,' CreditSights said. In the meantime, the most likely sources of cash infusions are ``white knight investors' such as billionaire Wilbur Ross, who has expressed interest in buying Ambac, according to the analysts.

To contact the reporter on this story: John Glover in London at [e-mail]

Last Updated: January 29, 2008 08:00 EST

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