Banks join to solve bond insurer crisis


By David Wighton, Aline van Duyn, Henny Sender, and Peter Thal Larsen
Financial Times, London
Friday, February 1, 2008

Leading US and European banks are joining forces to find solutions to the crisis among US bond insurers, whose problems threaten to exacerbate the impact of the credit squeeze.

One group of banks, including Citigroup and Barclays, is examining options for supporting Ambac Financial, one of the leading insurers. Separate teams are working with other bond insurers, according to people close to the process.

The moves come after efforts by Eric Dinallo, New York state insurance superintendent, to persuade the banks to back an industry-wide bailout for the beleaguered guarantors. John Thain, chief executive of Merrill Lynch, told the Financial Times that such an industry-wide solution would be "hard to get" given the banks' different exposures to the credit insurers. However, Mr Dinallo's initiative has spurred the banks to look at supporting the insurers on an individual basis.

Moody's Investors Service and Standard & Poor's, the biggest credit rating agencies, have warned that they may cut the triple-A ratings of Ambac and MBIA. This would force banks to make further writedowns or provide more capital against investments insured by the guarantors.

The group of banks looking at supporting Ambac includes Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Societe Generale, BNP Paribas, UBS, and Dresdner. The group is being advised by Greenhill while Credit Suisse is advising Ambac.

Ambac, which has been stripped of its triple-A rating by Fitch, needs to raise $1 billion, according to analysts. Uncertainty about whether Ambac and MBIA can find new capital in time to avoid losing their triple-A ratings has weighed on sentiment in the equity markets.

Time is running out for the bond insurers. Moody's said this week it would complete a review of the bond insurance industry by late February as it tries to determine how much more capital bond insurers need to account for rising losses from subprime mortgage securities.

Shares in the bond insurers rose yesterday on the news that banks were considering injecting cash into Ambac, first reported by CNBC.

Around midday in New York, Ambac was up 15.5 per cent to $13.45, and MBIA was up 5.4 per cent to $16.35. Both companies have seen their share prices fall by nearly 80 per cent in the past 12 months.

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