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Bond Insurers Need $20 Billion From Bailout: Dinallo

As much as $20 billion of the federal bailout plan for the financial industry should be put aside for bond insurers, New York State Insurance Superintendent Eric Dinallo said.

The money is needed because of a logjam in the credit default swaps market, which has sustained significant damage as the credit crisis has unwound. Credit default swaps set the price to insure corporate debt, and have been under pressure as companies have defaulted on bonds.

Correspondingly, leading bond insurers Ambac and MBIA have taken a beating, a situation Dinallo, speaking on CNBC, said needs to be addressed. He estimated $10 billion to $20 billion of the total $700 billion bailout should be dedicated to bond insurers.

He said federal money to help backstop the two companies should they sustain further pressure from defaults is one of the "cheapest, quick ways to help unlock the municipal bond market."

"We (were) looking for banks to step up and put some kind of backstop in place," Dinallo said. "We also asked Congress for some kind of backstop." (Clarification)

Dinallo's comments come as Lehman Brothers is unwinding its CDS load, an event not expected to be as damaging to the credit markets as initially feared. There initially were fears that the cost to companies holding Lehman debt could reach as high as $400 billion, but the actual payouts are expected to be much less.

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Clarification: The parenthetical word has been added to clarify the time frame.