Times are tough for bond insurers, which are expected to have to pay out billions of dollars after guaranteeing repackaged subprime mortgages and other risky debt. Deutsche Bank chief Josef Ackermann has warned that the bond insurers' difficulties could lead to the next financial crisis.
Banks are working hard to rescue bond insurers including FGIC and Ambac, and are considering giving up guarantees from the companies in exchange for equity stakes or warrants, people familiar with the matter said.
But the difficulty of rescuing bond insurers is evident from the experience of XL Capital Assurance. The unit of Security Capital Assurancewould need to have at least $6 billion of capital to support triple-A ratings, but only has an estimated $3.6 billion of claims paying resources, Moody's said.
Its future revenue might be strained as demand for its bond insurance decreases, the rating agency said. Moody's slashed XL Capital Assurance's ratings six notches. The insurer guarantees some $150 billion of debt.
Bill Ackman, who has been shorting shares of bond insurers since at least 2002, has told U.S. regulators that the rescue efforts are not a good idea and the bond insurers' holding companies should be allowed to fail.
Ackman said the insurers in recent years have become a means for banks to avoid reporting their full credit exposure and make their capital ratios appear stronger.
"We understand that the banking industry counterparties to the bond insurers would prefer to avoid taking these ... risks back on balance sheet -- particularly at a time when their balance sheets are strained by subprime and other losses that have not been hedged," Ackman wrote, adding that "there are no such free lunches available in the capital markets."
Regulators are watching the situation. U.S. Treasury Undersecretary Robert Steel told Bloomberg Television on Thursday that the department was in touch with ratings agencies and other concerned parties as part of its monitoring of the status of bond insurers.
"Our job is to monitor the situation, be vigilant and be helpful where appropriate," he said.
Private equity firm Warburg Pincus bought $300 million of common stock as part of MBIA's offering, in addition to the $500 million investment it had already made in the company. Warburg Pincus does not intend to exercise its right to buy $300 million of convertible preferred securities, MBIA said.
Warburg Pincus could potentially have been in a position to have options on, or share holdings equal to, more than half of MBIA's shares, had demand for the share offering not been so strong.
Rescue Efforts Continue
Banks are considering giving up guarantees on billions of dollars of exposure, according to people briefed on the matter, but the move could stabilize the insurers and give the banks a chance of collecting funds from the bond insurers in the future.
Separate bank groups are talking to Ambac and FGIC, in an effort to prevent the bond insurers' difficulties from creating market havoc.
The rescue talks, which also involve the New York regulator, may not prevent the insurers from losing the top "AAA" rating that is the basis of their current business.
However, this plan could help stabilize the insurers at a lower "AA" rating, sources said.
Under one of several rescue scenarios being considered, the banks would unwind guarantees on the banks' collateralized debt obligations. In return, the banks would get stakes in the insurers, perhaps through warrants, according to some reports.
A spokesman for New York insurance superintendent, Eric Dinallo, and FGIC, had no immediate comment.
Nor did a Paris-based spokeswoman for Credit Agricole. The French bank's Calyon unit was leading a group of banks, including UBS, Barclays, and Citigroup, in talks with FGIC.