Bond insurer breakups could hurt Wall Street

By Dan Wilchins - Analysis

NEW YORK (Reuters) - Breaking up U.S. bond insurers may be difficult and add to some Wall Street banks' heavy credit related losses, but for at least some insurers it may be the only solution to a crisis roiling credit markets.

FGIC Corp has told regulators it wants to break into two, a spokesman for the state insurance regulator said on Friday.

The municipal bond insurance operations, which are seen as safer, would be put into a new company. The structured finance business, where the company is likely to make big payouts, would stay in the current company.

That split would be a boon for capital markets, which fear bond insurers would lose their top ratings, forcing investors to sell billions of dollars of municipal bonds.

Investment banks that traded with FGIC, on the other hand, would be forced to take losses. Among the banks that were working on a rescue of FGIC, and therefore presumably have exposure, are Calyon, the investment banking unit of French bank Credit Agricole SA (CAGR.PA: Quote, Profile, Research, Stock Buzz).

Other banks involved in the FGIC rescue talks include Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), Citigroup Inc, (C.N: Quote, Profile, Research, Stock Buzz) Societe Generale,(SOGN.PA: Quote, Profile, Research, Stock Buzz) and UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz).

According to two people briefed on the situation earlier this week, when insurers are split, banks could provide credit lines or other backing to the companies left with the structured finance piece of the business. That could help support the existing companies for a little longer than they might otherwise last. Other options are being considered as well, people said.

Banks are generally facing the risks of big writedowns from hedges they put on with bond insurers.