Bond Insurers Seen Needing Up to $200 Bln

By Neil Shah

NEW YORK (Reuters) - A government-brokered rescue plan for U.S. bond insurers of about $15 billion came under fire on Friday, with analysts saying the ailing insurers may need as much as $200 billion to remain viable.

A cash infusion would allow the bond insurers to maintain their top credit rating, which is critical to their business of guaranteeing some $2.5 trillion of municipal bonds and asset-backed securities.

Analysts warned some investors would face huge write-downs on the valuation of securities guaranteed by the insurers if they lost their top credit rating, dealing another blow to a bruised U.S. economy. Those concerns contributed to a recent sell-off in stocks.

New York State Insurance Superintendent Eric Dinallo pressed major Wall Street banks this week to contribute billions of dollars to support the bond insurers, also known as "monoline insurers."

Some observers on Wall Street and elsewhere believe the New York state-orchestrated plan, which is only in the initial stages, may not go far enough.

"The numbers being bandied about of a $15 billion infusion into the monolines looks to us to be like putting a Band-Aid on a gushing wound," said analysts at hedge-fund Bridgewater Associates in a report to clients on Thursday.

They added that "looking at the price movements on the instruments they insure as well as their existing reserves, we would suggest they would need at least $70 billion on top of current reserves."

Sean Egan, managing director of independent credit-rating firm Egan-Jones Ratings Inc, said he expects roughly $80 billion of eventual losses for the top six monoline insurers.

That means the insurers probably need more than $200 billion to keep their "AAA" ratings, he said.

The news of the rescue plan sent shares of MBIA Inc (MBI.N), the largest bond insurer, rocketing higher from a recent 15-year low of around $6.75 last week. Speculation the company won't have enough capital to cover losses on bonds it insures has knocked its stock down from $76 a year ago.

The stock price of Ambac Financial Group (ABK.N), the second-largest bond insurer, also soared on Wednesday.

"Somehow (Dinallo) comes up with $5 billion to $15 billion. If the market actually bought that idea as a solution, it would have done that long ago," said Edward Grebeck, chief executive of Tempus Advisors, a debt strategy firm in Stamford, Connecticut.

But Dick Smith, an analyst at Standard & Poor's, said on Friday that even less than the $15 billion in capital cited in media reports could be enough to preserve the insurers' capital adequacy.

And a group that represents bond insurers said that the industry does not want and is not looking for a taxpayer bailout.

A statement from the Association of Financial Guaranty Insurers also tried to reassure markets that its members are "financially strong."