Tuesday, February 19, 2008

UPDATE: Bond Insurer Woes May Cause $7-$10 Bln Hit For Banks: Moody's

(Dow Jones) -- Downgrades of bond insurers could require banks and securities firms to increase reserves by between $7 billion and $10 billion, rating agency Moody's Investors Service estimated on Tuesday.

If trouble in the so-called monoline business gets even worse, banks may have to set aside $20 billion to $30 billion to boost reserves covering counterparty risks, the agency added.

Several banks hedged holdings of complex mortgage-related securities known as collateralized debt obligations (CDOs) by buying guarantees from bond insurers such as Ambac Financial (ABK), MBIA Inc. (MBI) and FGIC.

But FGIC has lost its crucial AAA rating and its two larger rivals are in danger of losing theirs too. If that happens, the guarantees they sold to banks will probably be worth less and these counterparties may have to write down the value of their hedges.

About 20 banks and securities firms have roughly $120 billion worth of hedges with financial guarantors on CDOs that contain asset-backed securities, Moody's said on Tuesday.

"We are currently evaluating these individual exposures to assess how institutions can absorb the additional counterparty reserves that might be required if one or more financial guarantors were downgraded," the agency said in a statement.

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