Bond insurers could cost finance firms $75B

A possible collapse of teetering bond insurers could cost financial firms, including Merrill Lynch and Citigroup, up to $75 billion.
JAN 30, 2008
A possible collapse of teetering bond insurers could cost financial firms, including Merrill Lynch & Co. and Citigroup Inc., as much as $75 billion, according to a report from Oppenheimer & Co. analyst Meredith Whitney, according to Crain's New York Business. The losses would come on top of over $100 billion in mortgage-related write-downs taken by financial firms over the last few months. The huge additional potential hit stems from guarantees for complex securities written by insurers including Manhattan-based Ambac Financial Group Inc. and Armonk, N.Y-based MBIA Inc.—the nation’s two largest bond insurers. Their survival is very much in doubt as they wrestle with enormous losses on insurance they wrote on mountains of mortgage-related securities. The New York state Department of Insurance is discussing a bailout plan as ratings agencies are preparing to slash the insurers’ pristine credit ratings unless they can somehow raise billions in cash to cover their losses. Those credit downgrades could be especially devastating for Merrill Lynch, Citigroup, and UBS, predicts Ms. Whitney, since they hold the largest amounts of guaranteed securities and would be forced to mark down their value steeply. Ms. Whitney pegged Merrill’s exposure to the bond insurers at $14.7 billion, Citi’s at $12.9 billion and UBS at $10.8 billion. Altogether, she estimates financial institutions have about $88 billion of exposure to the bond insurers. “When it becomes clear (as we think it will) that more charges are on the horizon,” Ms. Whitney wrote, “we believe the market will take another turn for the worse.” Further losses, in turn, could force Wall Street firms to tap overseas investors yet again for costly injections of cash. That would likely further depress the firms’ battered share prices and raise questions in Washington about foreign ownership of American banks. A bond-insurer bailout could help avoid this pain but Ms. Whitney deems it unlikely that such a plan will emerge. It also looks unlikely that the insurers will find sufficient capital to protect their credit ratings. As for the odds of finding other parties willing to take on the troubled businesses of MBIA and Ambac, Ms. Whitney said the chances are “akin to finding reinsurers for the 9th Ward after Hurricane Katrina.”

Latest News

Prediction markets are the new sports betting for young investors
Prediction markets are the new sports betting for young investors

Why younger clients are trading parlays for prediction markets and calling it investing

Samsung Life targets top stake in Principal Financial Group
Samsung Life targets top stake in Principal Financial Group

South Korea's largest life insurer is pursuing a $4.4 billion stake in PFG, one of the top three 401(k) providers in the US.

FP Alpha adds AI agent for future tax scenario planning
FP Alpha adds AI agent for future tax scenario planning

Advisors can prompt the AI agent to model a client's potential Roth conversions, home sales, income shifts, and state moves.

Archive Intel, Zocks pair up to tackle AI notetaker compliance gap
Archive Intel, Zocks pair up to tackle AI notetaker compliance gap

New integration flags non-compliant language in AI-generated meeting notes as regulators sharpen focus on advisor recordkeeping.

SEC alleges California fund managers ran $80 million 'Ponzi-like' scheme
SEC alleges California fund managers ran $80 million 'Ponzi-like' scheme

They settled the same day the SEC sued - but the penalty is still unset.

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income