New York State insurance regulators yesterday met with some of the largest Wall Street banks about raising capital to shore up the struggling financial guaranty insurers, while at least one deep-pocketed investor confirmed he is interested in entering the fray.
Wilbur Ross, the head of WL Ross & Co., told The Bond Buyer yesterday he has been looking at the bond insurance industry as a potential investment for the last few months, and has been talking with “a couple of the companies.”
However, Ross cautioned he may yet elect to stay on the sidelines.
“The problem is that these portfolios are quite opaque and consequently very difficult to figure out how big the whole truly is on a value basis,” Ross said. “The rating agencies, every few weeks, seem to change their valuation so it is a little bit like trying to catch a falling knife.”
Insurance regulators met with the U.S. banks, many of whom act as counterparties in complex derivative transactions insured by the bond insurers. The transactions could lose value in the event of bond insurer downgrades below triple-A — Fitch Ratings has already downgraded Ambac Assurance Corp. to AA — which could mean billions of dollars in write-downs for Wall Street firms that have already announced large losses related to securities backed by subprime mortgages.
“A counterparty could have a big incentive to not lose the triple-A rating on some of their holdings,” said Donald Light, senior analyst with Celent, a Boston-based financial research and consulting firm. “They may say we’ll throw in x million dollars in order not to take another haircut on another mark-to-market write down.”
Regulators are asking banks to immediately contribute as much as $5 billion, and $15 billion overall, in total capital to preserve the bond insurer’s triple-A ratings, the Financial Times reported yesterday citing sources familiar with the talks. Some market sources have said a capital pool is the likely solution, because it would mean full involvement from all the players set to gain from the preservation of the triple-A ratings.
Some analysts have said Wall Street banks, already suffering from subprime mortgage-related write downs, are in a poor position to help the monolines. In this environment, they say public funds in the form of a government-sponsored bailout may be necessary.
Reports of the potential investments led the stocks of bond insurers to rally yesterday.
In trading on the New York Stock Exchange, Ambac Financial Group Inc., parent of Ambac Assurance, rose 72%, or $5.73 , to $13.70, while MBIA Inc., parent of triple-A rated bond insurer MBIA Insurance Corp., rose 33%, or $4.08, to $16.61. Stocks of Security Capital Assurance, parent of triple-A rated XL Capital Assurance, rose 76%, or $1.64, to $3.79.
Security Capital Assurance Ltd. today said it will not pursue raising capital "due to current market conditions." The company said it will continue to look at other options, such as reinsurance or restructuring.
“The unprecedented uncertainty and instability affecting our industry make it impractical to consider raising new capital at the present time,” commented Paul S. Giordano, president and chief executive officer of SCA.
The stock was down more than 11% in after hours trading.
The New York Insurance Department said Tuesday it was working with the bond insurers and other stakeholders in taking a proactive approach — including efforts to attract private capital investments, facilitate solutions, and develop stronger regulations — in solving the problems of the bond insurers.
Also yesterday, Massachusetts Secretary of the Commonwealth William F. Galvin said he had subpoenaed Ambac and MBIA last week to determine if the financial guarantors had appropriately informed municipalities throughout the commonwealth about their exposure to potentially risky securities, such as collateralized debt obligations.
“If the credit quality of these companies comes into question, the impact on cities and towns is enormous, raising costs to municipalities and increasing investors’ risk,” Galvin said in a release.