Thursday, January 31, 2008

Thain says bond insurers bail-out unlikely

(FT) John Thain, Merrill Lynch’s new chief executive, said he expected individual credit insurers would receive capital infusions from investors, but that it would be difficult to craft an “industry-wide” bail-out for the beleaguered guarantors.

Mr Thain said an effort by New York state regulators to help leading bond insurers maintain their credit ratings was raising interest in the sector on the part of investors including private equity groups and specialists in distressed companies.

However, he said in an interview with the Financial Times on Wednesday that getting banks to agree on a single approach was unlikely because they have different exposures to the credit insurers and varying opinions on what should be done.

“I think that’s very hard to get a transaction put together across the whole industry. I think it’s more likely you’ll have a company by company solution,” Mr Thain said.

Uncertainty about whether leading bond insurers will be able to retain their triple-A credit ratings hit the stock market on Wednesday, with shares of Ambac and MBIA, the two largest insurers, falling 16 per cent and 13 per cent, respectively.

Highlighting the pressure on bond insurers, Fitch, a credit rating agency that has already cut Ambac’s triple-A rating, on Wednesday slashed the triple-A rating of FGIC, another bond insurer.

Eric Dinallo, New York state insurance superintendent, last week held a meeting with leading banks to urge them to provide up to $15bn for credit insurers.

Discussions have since focused on two possible sources of support – direct investments and back-up credit lines provided by banks.

Moody’s Investors Service and Standard & Poor’s, the biggest credit rating agencies, have so far maintained their triple-A credit ratings for Ambac and MBIA, although they have warned that these could be cut.

Such a move could force banks to take significant writedowns on securities and hedges that rely on the insurers’ triple-A credit ratings. Merrill already has taken writedowns on its exposure to bond insurers, including those still rated triple-A.

The New York regulators are in daily contact with the rating agencies to reassure them that talks about potential capital infusions are continuing.

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