Another day of uncertainty for bond insurers

Credit rating downgrades, bailouts or buyouts? Investors got no answers Thursday, but were comforted by revelations from MBIA execs.

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By David Ellis, staff writer

MBIA leads markets lower
A massive loss and writedown by the bond insurer raises concern about a credit downgrade and more exposure for beleaguered banks.

NEW YORK( -- Wall Street spent yet another session Thursday trying to make sense of what will happen next in the bond insurer crisis.

This time, much of investors' focus was on the ailing insurer MBIA after the company booked a $2.3 billion quarterly loss, due primarily to a $3.5 billion writedown the company took on its insured credit derivatives portfolio.

After reporting the dismal results, top executives at the Armonk, N.Y.-based bond insurer spent several hours calming jittery investors, who had been rattled by fears that the company and its rivals may lose their top-notch AAA rating.

Their efforts sent MBIA (MBI) stock 11% higher to $15.50 a share and lifted not only rival Ambac (ABK), which rose 7%, but the broader market as major indexes finished sharply higher.

Bond insurers have occupied much of the market's attention recently. Both Ambac and MBIA, which primarily focus on insuring corporate debt and municipal bonds, got caught up in the credit crisis after insuring toxic mortgage-backed securities, finding themselves overwhelmed by claims and short on capital. As a result, Standard & Poor's last month put the entire bond insurer industry on review for possible downgrade.

Wall Street is worried that a downgrade of Ambac or MBIA would not only severely damage the amount of business they do going forward, but would send a ripple effect across the broader financial sector. Major financial firms, which have already endured losses of more than $100 billion dollars as a result of the current credit crisis, could endure even more writedowns.

New York insurance regulators have reportedly started working feverishly to secure capital for the cash-strapped insurers, calling on a number of Wall Street firms to help, although no deal has been reached yet.

There has also been talk that a private equity or a distressed opportunity investor could step in to rescue these troubled firms, including famed distressed opportunities investor Wilbur Ross, who was reportedly in takeover talks with Ambac representatives.

"The credit crisis storm is still raging, and at this moment, no bond insurer can guarantee its own survival," said Donald Light, senior analyst at independent research and consulting firm Celent.

MBIA executives, however, spent several hours Thursday stressing that their company was well capitalized and well positioned to survive.

"MBIA remains a strong and stable franchise for the long haul," said Chuck Chaplin, the company's chief financial officer.

The firm also said it has closed on a $500 million stock sale to Warburg Pincus that was part of an up to $1 billion investment in the firm that Warburg had previously announced.

Warburg, under the terms of the stock sale, agreed to buy 16.1 million shares of MBIA at $31 a share.  To top of page

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