Banks Said To Work On Ambac Bailout

Amid continuing market jitters over the solvency of bond insurers, there was word today that banks may be coming to the aid of one threatened carrier.

A source with knowledge of the situation said work is underway for a bailout of New York-based Ambac Financial Group by eight financial institutions. On Jan. 18, Fitch Ratings reduced the insurer from “AAA” to an “AA” rating.

CNBC reported that Barclays, BNP Paribas, Citigroup, Dresdner, RBS, Societe Generale, UBS and Wachovia and are the banks involved in negotiations that include New York State Insurance Commissioner Eric Dinallo.

Mr. Dinallo released a statement saying he could not go into details and cautioning, as he has in the past, that any deal will not be done quickly

“While we cannot discuss specifics, there are a number of developments relating to the bond insurers,” he said. “We are continuing to communicate with all parties to help them reach firm deals as soon as possible. But as we have noted, these deals are complicated and take time.”

He reiterated that his department is working on a “three-point plan: 1. Bring in new players and facilitate new capital to current insurers, 2. Protect policyholders by seeking solutions to the broader problems in the bond insurance industry, 3. Rewrite regulations so they do not limit creativity essential to strong financial markets, but effectively prevent fraud and improper risk.”

Yesterday, a spokesman for Mr. Dinallo, David L. Neustadt, regarding the department's discussions, said: “We've been in pretty much constant daily discussions with all the stakeholders, insurers, banks, rating agencies, Treasury and the Fed.”

In reaction to reports of possible bank action, Tim Vandenberg of Washington Analysis, a Washington, D.C. securities research fund supplying information hedge funds, mutual funds and brokerages, wrote that “any bailout of the bond insurers by this consortium of banks would be a welcome positive for the credit markets–and hence credit-sensitive financial stocks…”

Two major rating firms yesterday took action on a variety of bond insurers.

Standard & Poor's placed various ratings on MBIA Insurance Corp., XL Capital Assurance Inc., XL Financial Assurance Ltd., and their related entities on CreditWatch with negative implications.

S&P lowered ratings on Financial Guaranty Insurance Co. to “AA” from “AAA,” and its senior unsecured and issuer credit ratings on FGIC Corp. to “A” from “AA.”

S&P also placed all the firm's ratings on CreditWatch with developing implications.

Moody's Investors Service, which has Ambac ratings under review, announced its financial strength ratings for five firms–resulting, the firm said, from the impact on bond insurers due to losses related to the residential mortgage market.

Moody's actions were as follows:

o The “Aa2″ insurance financial strength ratings of the mortgage insurance subsidiaries of The PMI Group and “Aa3″ IFS rating of Triad Guaranty Insurance Corporation on review for possible downgrade.

o The “Aa2″ IFS ratings of the mortgage insurance subsidiaries of Genworth Financial and the “Aa3″ IFS rating of Republic Mortgage Insurance Company were affirmed, but the rating outlooks were changed to negative.

o The “Aa2″ financial ratings of the mortgage insurance subsidiaries of United Guaranty Corp.–a wholly-owned subsidiary of American International Group–were affirmed with a stable outlook.

o Also, Moody's placed the Prime-1 commercial paper rating of MGIC Investment Corp. on review for possible downgrade. The “Aa2″ IFS ratings on the main mortgage insurance subsidiaries of MGIC Investment Corp. and the “Aa3″ mortgage subsidiary ratings of Radian Group Inc. remain on review for possible downgrade.

Moodys said during a conference call today that they plan on finishing their reevaluation of bond insurers by the middle of the month, and will be releasing ratings individually as they reach a conclusion.