The prospects of troubled bond insurers Ambac Financial Group and MBIA Inc have improved since news this week of a possible private bailout, but the rally in their credit default swaps may be short-lived given mounting doubts about the rescue effort.
Any plan to help bond insurers will take "some time" because of the complexity of the issues and the number of parties involved, New York State Insurance Superintendent Eric Dinallo said in a statement on Thursday.
New York's insurance regulator pressed major Wall Street banks to put up billions of dollars to support the bond insurers, which guarantee interest and principal on $2.5 trillion of bonds. With defaults by US subprime mortgage borrowers on the rise and securities linked to such loans sinking in value, fears have grown that insurers lack enough cash to fulfil obligations on about $930 billion of structured finance securities, including mortgage securities, they have guaranteed.
If Ambac and MBIA, the world's two largest bond insurers, lose their crucial top "AAA" credit ratings because of a lack of capital, Wall Street banks may have to write down the value of the hedges, or insurance, they put on troubled mortgage assets.
That could tighten the spigot on bank lending, potentially even hurting the US economy. The cost to protect bonds of Ambac's insurance unit from default has fallen about 280 basis points, or 39 percent, to 430 basis points since last Friday, meaning it costs $430,000 per year for every $10 million of debt insured, according to a Wall Street bank analyst.
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