February 14, 2008

Bond insurer woes could become market tsunami: Spitzer

WASHINGTON (Reuters) - The bond insurer problem must be fixed, or else it could become a "financial tsunami" that wreaks havoc on the broader economy, New York Governor Eliot Spitzer is due to tell the U.S. Congress on Thursday.

A copy of Spitzer's prepared testimony was obtained by Reuters on Wednesday.

New York State Insurance Superintendent Eric Dinallo is working with banks on rescue plans for several bond insurers, which guarantee more than $2.4 trillion of debt and are expected to suffer big losses from insuring bonds linked to subprime mortgages and other risk assets.

Those losses threaten the top credit ratings that insurers need to win new business. If insurers are downgraded by ratings agencies, investors that can only hold top-rated bonds may have to sell billions of dollars of securities, lifting borrowing costs for cities and consumers alike.

About two-thirds of bond insurers' business is guaranteeing municipal debt, and one-third is insuring repackaged consumer debt.

Higher borrowing costs and general credit market difficulties "could be a financial tsunami that causes substantial damage throughout our economy," Spitzer said in the testimony prepared for delivery to a House of Representatives Financial Services subcommittee at 11:30 a.m. (1630 GMT) on Thursday.

Spitzer's comments echoed recent remarks from Deutsche Bank Chief Executive Josef Ackermann, who said that bond insurer downgrades could send shockwaves through financial markets.

Regulators hope to help bond insurers keep their top credit ratings, but are also looking at protecting only the insurers' municipal bond insurance segments, Spitzer said.

"We have been clear from the beginning that municipal investors cannot be allowed to suffer from problems caused by another sector of the market," he said.

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