NEW YORK (Reuters) - New York’s insurance regulator pressed major banks on Wednesday to put up billions of dollars to support wobbly bond insurers, but banks are reluctant to open their checkbooks, people briefed on the matter said.
U.S. stocks soared on news of the discussions, which could prevent investors from being forced to sell billions of dollars of bonds the insurers had covered.
Discussions between banks and the New York State Insurance Department are in early stages, and may not create a concrete plan.
Banks are cautious about committing capital after the industry has recorded more than $100 billion of write-downs and credit losses, the people briefed on the talks said.
And after an aborted effort to rescue funds called structured investment vehicles, banks are wary of plans that consume a great deal of time but do not come to fruition, the people said.
But letting the bond insurers become overwhelmed by losses and write-downs may also be painful. The two largest U.S. bond insurers, Ambac Financial Group Inc and MBIA Inc, guarantee more than $1 trillion of securities, and the industry as a whole guarantees more than $2 trillion.
If the insurers lose their top ratings, investors that can only hold bonds with top ratings may be forced to sell their holdings, dumping billions of dollars of municipal bonds and repackaged loans into the market. That could lift borrowing costs for cities and consumers.
Banks that traded with bond insurers would have to write down their exposure. Merrill Lynch & Co Inc last week recorded a $3.1 billion write-down from soured hedges with bond insurers.
Bond insurers are reeling after writing down credit derivative positions linked to subprime mortgage debt and other forms of repackaged debt.
Ambac posted a $3.3 billion loss on Tuesday after recording a $5.2 billion write-down that ate through roughly two-thirds of the company’s net worth. Fitch cut the top triple-A ratings on Ambac’s main insurance unit on Friday after Ambac failed to raise $1 billion of new capital, and two other rating agencies have said they may also cut Ambac.
MBIA is also facing potential rate cuts.
News that a bailout may be in the works lifted Ambac’s shares 63 percent to $13.01 on Wednesday on the New York Stock Exchange. Still, the company’s shares have fallen 85 percent since the beginning of 2007. MBIA shares rose 36 percent to $17.00 on Wednesday.
The New York State Insurance Department held a meeting with bond insurance counterparties and policyholders, department spokesman David Neustadt said on Wednesday. He declined to specify the proposals suggested at the meeting.
New York State Superintendent Dinallo said in a statement on Tuesday that he was holding talks with parties about possible future capital investments in the bond insurance sector.
Representatives from the Federal Reserve system were not present, but the Fed is monitoring the situation.
The pressure to rescue bond insurers comes just weeks after a plan to rescue structured investment vehicles failed because of a lack of market interest.
In the fall, banks including Citigroup, JPMorgan Chase & Co Inc., and Bank of America Corp met with representatives from the U.S. Treasury to discuss setting up a rescue fund to prevent SIVs from having to dump assets.
But after months of work, the banks said there was no reason to launch the so called “super SIV,” as SIVs found other rescuers.
Credit default swap levels for Ambac’s main insurance arm for five-year protection tightened to around 425 basis points at the end of the day, or $425,000 per year, from 625 basis point mid-morning.
Additional reporting by Mark Felsenthal and Patrick Rucker in Washington and Tamawa Kadoya and Karen Brettell in New York; Editing by Gary Hill