NY Suggests that Bond Insurers Be Spared Downgrades

Officials with the New York State Insurance Department have reached out to Wall Street bond rating agencies to suggest that they postpone a downgrade of bond insurers until the state can develop a bailout package for the troubled sector, CNBC has learned.

Losing a Triple A rating could be devastating for the bond insurers, preventing them from drumming up new clients -- and possibly forcing them out of business.

Insurer Ambac Financial Group has received a downgrade from rating agency Fitch, but has so far been spared by Standard & Poor's and Moody's.

The ratings agencies realize they're walking a tight rope -- if they downgrade the insurers, they could expedite demise; on the other hand, if they follow New York's request and don't downgrade, they're in essence violating their duty to downgrade bonds on objective criteria.

Moody's downplayed the likelihood of striking a deal with New York, however. A spokesman for the ratings agency confirmed that Moody's has had conversations with the Insurance Department, but said "we don't forbear on our ratings" based on talks with government officials.

Standard & Poor's had no comment.

The New York State Insurance Department has hired Perella Weinberg Partners to advise on developing a bailout of the bond insurers, a spokesman for the department said on Monday.

As CNBC reported last week, banks that met with Insurance Superintendent Eric Dinallo asked him to hire an outside financial advisor.

Sources told CNBC that New York is considering one of two approach as a bailout plan: either a line of credit that bond insurers could tap as needed, or a deal that would deal with each insurer on an individual basis.

Bond insurers, who guarantee more than $2 trillion of securities, have suffered write-downs of bonds and derivatives linked to subprime mortgages. The losses are big enough to potentially trigger ratings downgrades, forcing some investors to sell securities guaranteed by the bond insurers.

Last week, New York State Insurance Superintendent Eric Dinallo met with banks to encourage them to put up cash to support bond insurers.

Perella Weinberg is looking at ways to protect policyholders of the major bond insurers.

Besides Ambac, another major insurer is MBIA.

- Reuters contributed to this report.