Insurers’ Woes Trouble Regulators, Banks

February 20, 2008 09:00 AM
by findingDulcinea Staff
U.S. regulators are scrambling to form a rescue plan for bond insurers, who help fund public projects and are hurting from the sub-prime crisis.

30-Second Summary

Some of America’s biggest insurers have seen their AAA credit ratings jeopardized or slashed over the past few months because of risky investments.

Trouble in this little known, though crucial, branch of the financial industry can hurt the wider economy, experts say.

As backers of municipal bonds, troubled insurers may make it more expensive for local governments to fund public projects, such as schools, parks, housing and roads.

Investment banks also stand to lose because they own billions of dollars worth of securities guaranteed by bond insurers. A downgrade in bond insurers’ credit ratings will depreciate those investors’ assets.

Lawmakers have responded by calling for greater oversight of the insurance industry. Federal Reserve Chairman Ben Bernanke said that an appropriate response to the financial crisis would be “strengthening the underlying economy.”

Some of the rescue proposals include capital infusions for individual insurers, a collective bail-out for the industry by Wall Street and the division of insurers’ business into risky and “safe” components.

The latter “bad book/good book” approach is favored by some regulators, but is opposed by big investors because it will do nothing for their holdings, which include billions worth of securities backed by sub-prime debt, Forbes writes.

Billionaire Warren Buffett’s offer to reinsure $800 billion worth of bonds will be rebuffed by insurers and banks for similar reasons, The Economist writes. It will help local governments, but will not shield insurers or banks from further losses.  

Headline Links: ‘Troubled Ambac Keen to Split’

Reactions: Regulators, Congress, and the Buffett plan

Opinion & Analysis: Evaluating the proposals

‘Good Book, Bad Book’
Buffett’s offer

Reference: Mortgages, securities, credit ratings and bond insurers


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