Bond insurers could cost finance firms $75B

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.”