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Bond insurers are latest link in financial meltdown

Associated Press
Published February 1, 2008


NEW YORK - As bad news about the financial system piles up, trust - the pillar of investing - is being buried.

The most recent fears are tied to the potential failure of bond insurers, which back the funding for hospitals, schools and other public works. A meltdown there could deliver another blow to battered banks and force higher taxes on homeowners.

That has made it difficult for the Federal Reserve - even with its aggressive rate cuts recently - to restore confidence and quash the volatility and uncertainty.

"The biggest issue is people just don't really know how big this is," Davin Gibbins, chief investment officer at Aris Corp., said of the losses banks could face. "People don't know the size of the problem, and markets hate uncertainty."

"People are afraid to make business decisions," said Donald Light, a senior analyst at Celent.

The risk that bond insurers could lose their top-notch credit ratings comes after world stock and credit markets have been shaken by billions in losses tied to subprime mortgages, or loans given to those with poor credit.

The Fed has made two rate cuts totaling 1.25 percent in the past two weeks in an effort to spur new investments through lower interest rates. But some investors are hesitant to make any investments, regardless of price.

That uncertainty has created wild swings in the market as every bit of information is analyzed.

Over the past few months, ratings agencies have downgraded or threatened to cut bond insurers' financial strength ratings, saying the companies - which make payments on bonds when the issuer is unable to do so - do not have enough extra cash to cover a potential spike in claims.

A downgrade from the crucial "AAA" rating would likely end the insurer's ability to book new business.

Standard & Poor's placed MBIA on a negative credit watch late Thursday and downgraded Financial Guaranty Insurance Co. Fitch Ratings had previously downgraded other bond insurers - Ambac Financial Group Inc. and Security Capital Assurance Ltd. - as well as Financial Guaranty.

The downgrades have led to a series of problems for municipalities who rely on the insurance.

If an insurer's rating falls, bonds backed by the insurer fall as well. The lower the rating, the higher the cost.

[Last modified January 31, 2008, 23:27:19]

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