The failure to maintain their AAA ratings will lead to a further round of multibillion-dollar writedowns among the Wall Street banks and other large owners of the bonds, Sean Egan of Egan Jones Ratings Company, said. It would also push some of them into receivership, Mr Egan added.
Egan Jones makes its money by selling its research to money managers, rather than through fees from the companies it rates. It has the same “nationally recognised statistical rating organisation (NRSRO)” accreditation from the US Securities and Exchange Commission as Fitch, Moody's and S&P, the mainstream credit agencies.
Mr Egan's warning comes after the New York Insurance Department, which regulates the state's insurance industry, held a hastily convened two-hour meeting this week to try to persuade key Wall Street firms to bail out the bond underwriters. The meeting is thought to have been attended by about 25 people, including representatives of Citigroup, JPMorgan, Goldman Sachs and Lehman Brothers, which would be likely to suffer if the bond insurers went under.
Because it raises the possibility that an insurer may not meet its commitment, loss of its AAA credit rating cuts the value of the bonds it insures.
A ratings downgrade also makes it harder for an insurer to write new business, as the market loses confidence in it. Furthermore, many bond investors require that their debt holdings be underwritten by a AAA-rated insurer.
One insurer, Ambac, has already lost its AAA-rating, while Mr Egan has a B-plus rating on MBIA, the biggest bond insurer, which is 13 notches below the AAA-rating it has from S&P, Moody's and Fitch.
Eric Dinallo, New York's insurance superintendent, who is leading the talks with Wall Street, sought to play down the markets' hopes for the talks yesterday. He said: “It must be understood that these are complicated issues involving a number of parties.”
New York's attempts to prop up the mortgage bond industry are part of a US government drive to prevent America falling into recession. Washington yesterday reached a tentative deal to inject $150 billion into the flagging US economy through tax breaks and investment incentives. Earlier this week, the Federal Reserve cut interest rates by three quarters of a point, the largest cut for 26 years, as a stimulus.