NEW YORK SEEKS SOLUTION FOR BOND INSURERS

With both  Ambac and MBIA’s bond ratings under pressure, regulators are taking an aggressive role in seeking to shore up capital for the beleaguered bond insurers.

New York state’s insurance superintendent has been active behind the scenes seeking to line up Wall Street and bank support for the ailing insurers. The state’s insurance department is known for its strong oversight of the insurance industry.

At the request of Eric R. Dinallo, meetings have been held with a number of Wall Street’s largest firms in an urgent effort to press those firms to shore up the municipal bond industry’s two largest insurers. New York’s interest in seeing Ambac and MBIA remain solidly at the “AAA” level shows its concern as to what a crippled bond insurance industry would mean for local government access to the capital markets, as well as the impact on holders of such debt. Many banks, pension funds, and private individuals could see their high grade investments downgraded, although traditional municipal issuers would still be expected to meet their debt service requirements from their own resources.

New York is also concerned that if the large insurers are no longer able to cover their exposure to the sub-prime market, major losses could be incurred by Wall Street firms and banks, which used this insurance to insulate them from the Collateralized Debt Obligation (CDO) contagion.

Dinallo has pressed the banks and other Wall Street firms to produce a plan to provide joint capital pools and other similar remedies to enhance the financial profiles of the two guarantors.

Separately, there have been persistent rumors that billionaire financier Wilbur Ross has expressed a serious interest in buying or investing in Ambac.

Regardless, bondholders of insured bonds are receiving their principal and interest payments from the issuers of such bonds. This is expected to continue regardless of how the talks progress.

1/24/08