New York is Trying to Aid Ambac and MBIA by Arranging a Bail-Out

This dovetails nicely with the post below about CDS contracts. However, we have seen attempted bail-outs before with the M-LEC or the SIV bail-out plan started by Citigroup, J P Morgan, and B of A. After four months of wrangling the project was dropped in December. We will see how this one succeeds. However, if the insurance companies for CDS contracts cannot step up when required this could be the torpedo that sinks the financial system. Text in bold is my emphasis. From Bloomberg:

New York's insurance regulator said a plan to have U.S. banks aid bond insurers will ``take some time to finalize.''

``Clearly it is important to resolve issues related to the bond insurers as soon as possible,'' Insurance Superintendent Eric Dinallo said in an e-mailed statement. ``However, it must be understood that these are complicated issues involving a number of parties.'' MBIA Inc. and Ambac Financial Group Inc., the industry's two largest firms, are both based in the state.

Dinallo, who met with industry executives yesterday, is trying to bolster the bond insurers with help from banks and securities firms. A failure of an insurer might trigger downgrades among $2.4 trillion of debt they guarantee, spawning a new round of losses and writedowns on top of the $133 billion already posted by the world's biggest financial firms.

``We believe it is important that the goals of market stability, protection for policyholders and a healthy and competitive bond insurance market be realized in the near future,'' Dinallo said in the statement.

Any rescue plan may be fraught with the same difficulties that befell Treasury Secretary Henry Paulson's attempt last year to lead a combined bailout of structured investment vehicles, analysts said. The effort was ultimately dropped after banks failed to reach agreement.

A plan that limits participants to U.S. financial institutions may fail, said David Havens, an analyst at UBS AG in Stamford, Connecticut.

``Although it may be something they're trying with the best of intentions, trying to get everybody globally to agree on something would be like herding cats,'' Havens said.

If Dinallo succeeds, the insurers may get fresh capital of as much as $15 billion, the Financial Times said on its Web site yesterday. The figure may be smaller, a person familiar with the talks told Bloomberg yesterday.