Subprime Impact On Bond Insurers Assessed

The worst-case scenario from the subprime mortgage crisis would be bond insurer defaults, executives with the insurance broker Aon suggested.

If such an event should occur, the bond insurers' failure to cover losses would spell a serious downturn for the economy, they warned.

Their observations came as part of a Web seminar titled “Financial Reporting: Consequences of the Mortgage Market Meltdown,” moderated by Paul Graziano, executive vice president Aon's industry and product group.

In response to a question from listeners submitted to Mr. Graziano, Scott Van Meter, managing director, Aon financial advisory and litigation consulting services, said a failure by bond insurers to cover losses was a worst-case scenario. What is a greater possibility, though still remote, would be a series of downgrades to the insurer's ratings.

“[That] would have a terrible impact,” said Mr. Van Meter.

He noted Monday's move by Warburg Pincus, a private equity firm, to inject $1 billion into bond insurer MBIA Inc. with a purchase of the company's stock, was one move to keep a downgrade from happening.

MBIA, based in Armonk, N.Y., announced yesterday that it would not hold its Friday investor conference call while three rating agencies are at work on the company's rating.

Bond insurers, said Mr. Van Meter, are worried about their “triple-A” ratings, and the stock markets are reacting with equal concern reflected by drops in the companies stock prices.

“It will become impossible for them to write [coverage] if they lose their ratings,” he observed.

“[Bond insurers] are under a lot of pressure to keep their ratings,” said Roger Siefert, executive vice president and group leader of Aon financial advisory and litigation consulting services.

Xavier Oustalniol, managing director with Aon financial advisory and litigation consulting services, said a rating decrease could have serious economic impact on banks because regulations require them to have bond insurance. Without that insurance, they would be unable to lend, which would have a serious ripple effect throughout the entire economy.

The Webcast is available at www.aon.com/webseminars.