Banks on the hook if muni bonds tank

Banks, still hurting from painful write-downs, may need to set aside $143 billion in reserves if municipal bonds wind up being downgraded, according Barclays Capital. If the bonds insured by Ambac Financial Group and MBIA Inc. are cut one level from AAA, banks around the world will need to raise a minimum of $22 billion, according to a report by Paul Fenner-Leitao, a Barclays Capital analyst, released today. If the bonds’ ratings fall to A, the banks will have to raise six times as much capital. Those numbers are based on banks holdings of $820 billion in bonds. In recent weeks Ambac and MBIA have been on ratings agencies’ radar. Fitch Ratings downgraded Ambac to A last week, and both insurers are under review by Moody’s Investors Service and Standard & Poor’s. The quality of the bonds themselves — worth $2.4 trillion — is now in question, Mr. Fenner-Leitao noted. Yesterday, Eric Dinallo, insurance superintendent in New York State, met with Wall Street banks, including Citigroup Inc., to discuss a bailout of the two bond insurers, according to The Wall Street Journal. Through collateralized debt obligations and other securities, Citigroup has some $3.8 billion of exposure to bond insurers, the Journal said.