Talks provide a boost for bond insurers

New York state insurance regulators confirmed Wednesday that they met with some major U.S. banks to discuss raising fresh capital for struggling bond insurance companies.

Talks with the unnamed banks were part of New York State Insurance Superintendent Eric Dinallo’s effort to stabilize the bond guarantors and bolster the industry’s finances, agency spokesman Andrew Mais said.

The report, which first appeared Wednesday in the Financial Times, helped spark a rally in financial stocks that spilled into the broader market.

Bond insurers including MBIA Inc. and Ambac Financial Group Inc. have been hammered by losses tied to their guarantees on mortgage-related securities.

Ambac last week lost its AAA credit rating from Fitch Ratings on concerns about the company’s financial strength. The company said Tuesday that it was exploring “strategic alternatives” for its business, including bringing in financial partners.

The insurers’ troubles threaten the huge municipal bond market because so many of those securities are backed by private insurance. Insured muni bonds usually carry the debt rating of the insurer, which means that a downgrade of the insurer would hurt the bonds as well.

Because major banks, too, have financial exposure to the insurers, it would be in their interest to buttress the companies’ capital.

The infusion under discussion could total as much as $15 billion, the Financial Times reported.

But people briefed on the day’s talks said the banks were cautious about committing capital given their financial challenges.

They may be under pressure from regulators, however. Federal Reserve Bank of New York President Timothy Geithner has taken a central role among federal regulators monitoring the financial health of bond insurers since October, according to an official familiar with the matter.

Ambac’s shares soared $5.73, or 72%, to $13.70 on Wednesday. The stock has plunged from a high of $96 last year. MBIA jumped $4.08, or nearly 33%, to $16.61. Its shares traded above $70 last year.

“The market is obviously viewing it as positive news,” said Kathleen Shanley, an analyst with bond research firm Gimme Credit in Chicago. “Shareholders and holding company creditors should keep in mind, however, that the insurance department’s primary mandate is to protect policyholders, not to boost the share price,” she said.