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Bond Insurer Woes May Cause $7B-$10B Hit For Banks - Moody’s

Feb.19, 2008 in Market Outlook

Bond Insurer Woes May Cause $7B-$10B Hit For Banks - Moody’s

Last Update: 2/19/2008 3:16:57 PM

By Alistair Barr

Downgrades of bond insurers could require banks and securities firms to increase
reserves by between $7 billion and $10 billion, rating agency Moody’s Investors
Service estimated on Tuesday.

If trouble in the so-called monoline business gets even worse, banks may have to
set aside $20 billion to $30 billion to boost reserves covering counterparty
risks, the agency added.

Several banks hedged holdings of complex mortgage-related securities known as
collateralized debt obligations by buying guarantees from bond insurers such as
Ambac Financial Group Inc. (ABK), MBIA Inc. (MBI) and FGIC.

But FGIC has lost its crucial AAA rating and its two larger rivals are in danger
of losing theirs too. If that happens, the guarantees they sold to banks will
probably be worth less and these counterparties may have to write down the value
of their hedges.

About 20 banks and securities firms have roughly $120 billion worth of hedges
with financial guarantors on CDOs that contain asset-backed securities, Moody’s
said on Tuesday.

“We are currently evaluating these individual exposures to assess how
institutions can absorb the additional counterparty reserves that might be
required if one or more financial guarantors were downgraded,” the agency said in
a statement.

-Alistair Barr; 415-439-6400; AskNewswires@dowjones.com

(END) Dow Jones Newswires

February 19, 2008 15:16 ET (20:16 GMT)

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