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.”
But questions about insurers’ business viability have to be resolved to protect their ratings, said S&P’s Dick Smith.
Fears are growing that the bond insurers don’t have the cash to fulfill obligations on roughly $930 billion of structured finance securities, including mortgage bonds.
With defaults by subprime mortgage borrowers on the rise and subprime-related securities sinking in value, analysts worry that insurers could be liable for billions of dollars worth of insurance payouts.
Wall Street banks have invested in ailing “strutured finance” securities that have a top rating due to guarantees from the bond insurers. A downgrade of the bond insurers would force the banks to write-down the value of those bonds to reflect the higher risk.
To offset those potential losses on insured bonds, banks may need to raise up to $143 billion in additional capital, Barclays Capital analysts said in a report on Friday.
Meanwhile, billionaire private equity investor Wilbur Ross is weighing the merits of investing in an existing bond insurer or starting his own firm, the Financial Times reported on Friday.
A decision by Ross to launch a new bond insurer could put even more pressure on MBIA and Ambac.
Like Ross, some private-equity firms such as TPG may also be considering launching new bond insurers, the report said. TPG declined to comment.
Billionaire investor Warren Buffett’s Berkshire conglomerate in late December was granted a license from New York state to operate as a bond insurer.
On Thursday, The New York Times said that late last year Dinallo encouraged Berkshire Hathaway to enter the bond insurance business.
At the time, Buffett said he did not want to invest in existing guarantors because of their financial problems, and he started his own firm instead.
Goldman Sachs estimated on Thursday that Ambac would be worth $15 a share in a “run-off” scenario where the insurer would effectively slowly wind down its business, and $35 in a bailout scenario, though it sees the New York-brokered plan as unlikely to produce results. MBIA would be worth $6 in a “run-off” and $48 after a bailout, Goldman said.
“Our companies are absolutely intent on keeping the “triple A” rating, or getting it back if they lose it,” said Bob Mackin, executive director of the Association of Financial Guaranty Insurers.
Additional reporting by Jennifer Ablan, Dena Aubin, Richard Leong, Dan Wilchins and Megan Davies in New York and Kevin Drawbaugh in Washington; Editing by Tom Hals