US bond insurance

Wall Street's biggest investment banks face at least $10bn (£5.1bn) of fresh write-downs related to the possible collapse of some of the world's biggest bond insurers - a new problem that could be just the tip of another financial iceberg.

Merrill Lynch shed some light on the extent of the bond insurance crisis when it revealed another set of ballooning losses last Thursday. Alongside that $16.7bn mountain of virtually worthless sub-prime related paper was a $3.1bn charge connected to insurance taken out to protect some of the mortgage-backed securities on its books.
It set aside $1.9bn alone for contracts insured by ACA Capital Holdings, the most troubled of the bond insurers.
Banks such as Merrill Lynch and UBS, among others, transferred billions of dollars of credit risk to so-called 'monoline' insurers in case the dodgy sub-prime backed bonds on their books ever defaulted. It seems the banks were right to be cautious, as the bonds have since proved to be next to worthless. But the sheer volume of defaults has ramped up the pressure on the monoline insurers to such a degree that many are unable to meet their obligations.
Oppenheimer analyst Meredith Whitney, using the Merrill Lynch case as a rough model, believes the biggest investment banks in the world face new write-downs amounting to about $10bn of their $12.7bn worth of bonds insured by ACA alone. At the top of the list is UBS, which was the biggest underwriter of the asset-backed securities called collateralised debt obligations (CDOs) when ACA was most active. UBS will have to write down $1.4bn of its ACA-backed hedges, Whitney estimates.

A whole host of bond insurers were last week downgraded by ratings agencies Moody's, Standard & Poor's and Fitch, which not only places them in a precarious position but creates another big headache for Wall Street.

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