Bankers Downplay Reports of Bond Insurer Rescue

Bankers who met with New York insurance regulators to discuss a reported bailout of troubled bond insurers downplayed the meeting's significance Thursday, with one calling it a "non-event."

Eric Dinallo
NY State
Eric Dinallo

Bankers told CNBC that there was no consensus formed at the meeting and no movement on creating substantial plans for a rescue. Moreover, reports of the meeting may have made a bad situation for the industry worse, bankers said, as a subsequent jump in bond insurer stock prices scared off private equity firms that may otherwise have injected capital into the companies.

News of the meeting helped boost the overall stock market Wednesday. But shares of both MBIA and Ambac Financial Group were sharply lower Thursday after skyrocketing higher the day before.

Regulators met with a number of investment banks to determine if a bailout can be worked out for companies that insure municipal bonds; the insurers have been badly hurt in the meltdown of subprime mortgages, which could lead to a spike in insurance claims.

New York's top insurance regulator himself appeared to play down reports of a bond insurer rescue plan in a statement Thursday. Insurance Superintendent Eric Dinallo said it will take time to implement a series of measures to prop up the bond insurance industry and that his agency won't comment on widely reported details of the plan.

"Clearly it is important to resolve issues related to the bond insurers as soon as possible," Dinallo said. "However, it must be understood that these are complicated issues involving a number of parties and any effective plan will take some time to finalize."

News reports and analysts have said the plan could include investment banks providing as much as $15 billion to help struggling companies.

Dinallo said he won't respond to "rumors" about the measures being discussed. Also Thursday, shares of bond insurers fell sharply after Fitch Ratings cut the financial strength rating of Security Capital Assurance to "A" from "AAA."

Fitch earlier cut the crucial financial strength rating of another insurer, Ambac Financial Group, to "AA" from "AAA." Bond insurers essentially need a "AAA" rating to generate new business.

Both companies scrapped plans to raise additional capital, which the rating agency had demanded as a condition of maintaining the highest rating.

Friedman, Billings, Ramsey & Co. analyst Steve Stelmach wrote in a research note Thursday a bailout could entail investment banks providing $5 billion immediately to help struggling companies. That could satisfy capital shortfalls at Security Capital Assurance, Ambac and other insurers. The investment banks could pour in an additional $10 billion in the future, Stelmach said.

-- AP contributed to this report.