Bond insurers want $125 bln of cover wiped out -FT

NEW YORK, June 22 (Reuters) - Bond insurers such as Ambac Financial Group (ABK.N), MBIA Inc (MBI.N) and FGIC are talking to banks about wiping out $125 billion of insurance on risky debt securities to limit the damage to the insurers from the credit crisis, the Financial Times reported on its website on Sunday.

Discussions about "commuting" these insurance contracts, which were sold by the bond insurers to banks in the form of credit default swaps (CDS), have taken on a renewed sense of urgency amid a rash of rating downgrades in the bond insurance sector, the report said.

The talks centre on CDS contracts issued by bond insurers to guarantee payments on collateralised debt obligations (CDOs), complex debt securities often backed by mortgages that have plunged in value amid a wave of foreclosures, the FT said.

The nominal value of these CDSs on CDOs is about $125 billion, according to estimates by Standard & Poor's, the FT said.

Bond insurers are in different stages of financial trouble, with smaller ones such as FGIC already rated in the junk category. Last week, Ambac and MBIA lost their last triple-A credit ratings after Moody's downgraded them to double-A and single-A respectively. Both ratings have a negative outlook.

The impact of the downgrades of the bond insurance arms of MBIA and Ambac will be widespread in the structured finance market and add to pressures on some financial institutions, Standard & Poor's said earlier this month.

S&P has also stripped MBIA Insurance Corp and Ambac Assurance Corp of their top ratings due to their declining ability to generate new business and their diminished financial flexibility.

Many financial companies that are exposed to the bond insurance sector have already written down the value of their insurance, and current ratings on the banks have leeway to absorb incremental additional write-downs.

The riskiest exposure banks hold to the so-called monolines is through insurance they purchased on debt backed by risky assets such as residential mortgages.

Merrill Lynch & Co Inc MER.N has one of the largest exposures to these types of assets, with $18.8 billion in super senior asset-backed collateral debt obligations (CDOs) as of March 28, according to an S&P report.

Merrill wrote down $1.34 billion of this exposure in the fourth quarter of 2007 and the first quarter of 2008.

Citigroup Inc (C.N) has purchased $10. 5 billion in protection of similar securities and wrote down $1.5 billion of this exposure in the first quarter of 2008, S&P said. (Editing by Alan Raybould)