Friday, January 25, 2008

Banks May Need $143 Billion for Insurer Downgrades

(Bloomberg) -- Banks may need to raise as much as $143 billion to meet regulators' requirements should rating firms downgrade bond insurers, Barclays Capital analysts said.

Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Banks own $820 billion of structured securities guaranteed by bond insurers, the report said.

``This is a huge amount, but the assumptions we use are also very aggressive,'' Fenner-Leitao in London said in a telephone interview. The estimate shows how bank capital could be diminished in the event of significant downgrades, he said.

Fitch Ratings cut New York-based Ambac Assurance Corp. by two levels to AA last week, and Moody's Investors Service and Standard & Poor's are reviewing Ambac and MBIA for downgrades, casting doubt on the credit quality of $2.4 trillion of bonds the industry guarantees. Wall Street firms led by Citigroup Inc., Merrill Lynch & Co. and Bank of America Corp. raised $72 billion from investors after reporting more than $133 billion of writedowns and credit losses triggered by the collapse of the subprime mortgage market.

New York's Insurance Superintendent Eric Dinallo met with executives of banks and securities firms this week to ask them to extend capital to bond insurers and stave off credit rating reductions. The regulator said yesterday its rescue plan will ``take some time.''

Ambac rose today amid speculation that billionaire Wilbur Ross will buy the company. A deal may come within the next two weeks, the Evening Standard newspaper in London reported on its Web site.

Fitch is likely to cut the rankings of other bond insurers in the ``very near term,'' with Financial Guaranty Insurance Co. at greatest risk, Fenner-Leitao wrote in the report.

The capital banks would need to raise includes stock and subordinated debt, the report said.

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