Bond insurers try to erase insurance

Following a series of downgrades from ratings agencies, bond insurers are in talks with banks, looking to wipe away some $125 billion of insurance on debt securities, the Financial Times reported today. Insurers, including New York-based Financial Guaranty Insurance Co., Ambac Assurance Corp. of New York and MBIA Inc. of Armonk, N.Y., gave the banks insurance contracts in the form of credit default swaps. These swaps insured payments on collateralized debt obligations, which were normally backed by subprime mortgages. Should the banks erase the insurance coverage (also known as “commuting” a contract), they will nix the contract in return for a payment from the insurers. Those mortgages have plummeted in value in the past couple of years, following numerous defaults and foreclosures. The value of the contracts is now up in the air but is estimated to be about $125 billion, according to Standard and Poor’s of New York. Financial services firms, including Citigroup Inc. and Merrill Lynch & Co. Inc., both of New York, have taken write-downs on their quarterly financials due to the deteriorating value of the mortgage-backed securities.