Bond crisis: Sovereign funds hold their bets

NEW YORK (Fortune) -- Deep-pocketed foreign wealth funds have been more than happy to bail out Wall Street by taking large stakes in important financial institutions that the funds believe cannot fail.

But that has not been the case for bond insurers, a class of once-obscure firms whose fortunes are taking a licking because they insured the mortgage-backed securities that collapsed as a result of the current credit crisis.

The so-called monolines - key players in the financial food chain - are in desperate need of capital. As a testament to how bad their outlook is, funds from Dubai to Singapore seem, for now, unwilling to take the plunge.

"All the bond insurers have hired bankers who are out there flogging these companies and trying to find money. The chances are high that they've looked everywhere, even overseas," says Christopher Whalen, co-founder and managing director of Institutional Risk Analytics, a firm that has closely tracked the troubles in the subprime mortgage industry.

The likely reason for the dearth of deals: The companies are too close to collapse. The credit markets see a 40% chance that MBIA, for one, will default on its bonds.

"There is no point in taking an equity stake in one of these companies. They are too troubled," says Whalen.

The sovereign funds may also be unhappy with the investments they've already made in Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).

Only months after Citigroup secured a $7 billion infusion from the Abu Dhabi investment authority, Citi had to seek more capital. Under the terms of these agreements, each new investor is given preferred stock that dilutes existing investors.

"Every time Citi asks for more, it dilutes the investment made by that first rescuer," says Whalen. "This is not what the sovereign wealth funds that jumped in to this situation were looking for."

In all of the brouhaha, Warburg Pincus emerged as a lone buyer last December. The private equity firm agreed to inject $1 billion into MBIA (MBI), which broke down to about $31 a share. The stock is currently trading at about $15.

When the deal was announced, Warburg Pincus managing director David Coulter said: "MBIA is well positioned at this juncture to drive the business forward. Our investment further solidifies MBIA's capital strength to enable the company to withstand, but more importantly, take advantage of, the current volatile credit environment."

A Warburg spokesman says the firm's analysis of MBIA has not changed, even though MBIA said Thursday that it posted a net loss of $2.3 billion in its fourth-quarter. MBIA also said it will take a pre-tax net loss of $2.3 billion on policies it issued for collateralized debt obligations.

"Warburg Pincus made a ghastly mistake and I believe will lose all of their money," says Whitney Tilson, whose hedge fund T2 Partners is short MBIA. "They likely knew about many of the problems, but didn't understand how serious the implications were."