Filed under: Deals, Industry, Citigroup Inc. (C), MBIA Inc (MBI)
Bond insurers including MBIA (NYSE:MBI) and Ambac (NYSE:ABK) can turn down an offer from Warren Buffett to back their muni-bond assets, but they will still have to get capital from somewhere. Government officials, especially in New York State, have been trying to get the big money center banks such as Citigroup (NYSE:C) to put that money up.
The question is whether the banks can spare the capital. As the FT notes of the Buffett program “it does not relieve the ratings pressure on the bond insurers, because of their exposure to structured bonds.” In other words, bond insurance companies could still be downgraded by credit agencies and the bonds that they insure could also have their ratings cut.
That would be bad news for banks who hold a lot of the muni-bonds and derivatives based on them. If this debt is devalued, banks could be forced to another round of write-offs.
What is clear is that the Buffett plan does not address the most critical need of the insurers. They must have help with their exposure to CDOs and other structured investments involving subprime paper. The banks are now damned if they put up capital that they might not readily have and damned if they don’t because bonds on their books, which are now insured, could lose their value.
A bit of a Mexican stand-off.
Douglas A. McIntyre is an editor at 247wallst.com.
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