A group of banks are in early talks about forming a consortium to raise capital for bond insurer Financial Guaranty Insurance Co., the Wall Street Journal reported Tuesday, citing unnamed persons familiar with the situation.
The effort is led by Calyon, the investment-banking unit of French bank Credit Agricole SA. The others in the bank group include Citigroup Inc., UBS AG, Societe Generale, Barclays PLC and BNP Paribas SA. The group may not be able to come up with a plan, the report said.
A successful capital plan for ailing FGIC would help shore up the weakened insurance business and stave off a wave of downgrades that could result in billions of dollars in losses.
The bond insurers are facing downgrades because they guaranteed the principle and interest payments of securities underpinned by subprime mortgage loans. These securities have decreased in value, pressuring bond insurers to ration capital.
The ratings agencies are worried that the insurers’ capital has become so strained that they would not be able to deal with a heavy number of defaults on the bonds they back.
A spokeswoman for PMI Group, which is a part owner of FGIC, said her organization would not comment on the report. An FGIC spokesman did not return telephone calls to the Associated Press.
Mirko Mikelic, a senior portfolio manager at Fifth Third Asset Management, said banks appear to be going to unusual lengths to find ways to bail out the insurers because of the large number and variety of assets involved.
Although municipal bonds are the most visible part of the bond insurance industry, a large number of corporate bonds, money market funds and interbank loans also carry insurance, Mikelic said.
Separately, Fitch Ratings said Tuesday it may slash its rating on MBIA Inc., the latest threat to the beleaguered bond insurance industry and the trillions of dollars in debt it protects.
Fitch placed the Armonk, N.Y.-based insurer’s vital “AAA” financial-strength rating under review for a possible downgrade.
Fitch also said it took various rating actions on 172,326 bond issues insured by MBIA. The actions affected 172,168 municipal bond issues and 158 non-municipal bond issues. Unaffected were about 430 MBIA-insured bonds with an underlying “AAA” rating and not on Rating Watch Negative, Fitch said.
Top-notch ratings are crucial for bond insurers, which write policies promising to repay bondholders when bond issuers default. Those ratings enable them to win new business.
Ratings downgrades and the prospect for more have rocked the bond insurance industry and the broader financial markets in the past few months. Fitch has downgraded Ambac Financial Group Inc. and Security Capital Assurance Inc., while Fitch and Standard & Poor’s have downgraded Financial Guaranty Insurance Co.
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