Financials' monoline write-downs may top $70 billion

Financials' monoline write-downs may top $70 billion
By Karen Brettell Reuters - Wednesday, January 30 07:58 pm

NEW YORK (Reuters) - U.S. financial institutions are on the hook for as much as $70 billion (35.2 billion pounds) in new write-downs from bond insurers in 2008, Oppenheimer said on Wednesday, as losses from ailing monolines spread deeper into European bank results.
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Monolines are insurers that guarantee timely interest and principal payments on bonds and sell protection on structured deals -- collateralized debt obligations (CDOs) -- with credit default swaps.

The risk of monolines failing has caused turmoil for investors who have purchased their protection on assets. The monolines' investment-grade "AAA" ratings are on review for possible downgrades by credit ratings agencies that view their capital as insufficient due to exposure to risky subprime mortgages.

Oppenheimer said it sees a minimum of $40 billion in additional write-downs from monolines, but that the figure could be as large as $70 billion, noting that majority of the write-downs would be concentrated between Citigroup , Merrill Lynch and UBS .

EXPOSURE WIDESPREAD

Swiss investment bank UBS on Wednesday unveiled $4 billion in new subrime-related write-downs.

Analysts said part of a $2 billion hit at the bank was connected to monolines, underscoring fears the insurers' troubles could set off a chain reaction that would cripple the banking sector and the global economy.

BNP Paribas , France's biggest publicly-traded bank, revealed a 456-million-euro (340.3 million pound) fourth-quarter write-down from bond insurers.

Merrill Lynch Chief Executive John Thain said on Wednesday the company's net exposure to troubled monoline bond insurers is about $3.5 billion. The bank last week wrote off almost $2 billion of exposure from one of the weakest bond insurers, ACA Capital Holdings .

Thain said if monolines "disappeared from the face of the Earth," they would owe Merrill Lynch about $6 billion, though he did not expect that to happen.

Merrill has reserved $2.6 billion against the estimated $6 billion write-down, leaving about $3.5 billion in monoline exposure, he said.

Oppenheimer, however, views Merrill's potential losses as much larger than what Thain estimates.

The brokerage said future downgrades of monoline insurers by ratings agencies could put another $100 billion in assets held by banks in jeopardy of further write-downs, adding that it expects a write-down of about $10 billion at Merrill if the downgrades happen.

BAILOUT

Fears of market turmoil resulting from the possible downgrades of the monoline insurers has provoked regulatory interest, though some analysts consider that any regulatory solution is likely to come too late.

New York State Insurance Superintendent Eric Dinallo is working with banks to help the bond insurers raise capital to strengthen their balance sheets.

New York Gov. Eliot Spitzer said on Tuesday he was working "extraordinarily hard" to aid troubled bond insurers and would do whatever is appropriate for the bond market.

But analysts said that any bond insurer bailout is likely to end up looking like the SIV bailout -- a selective rescue of the biggest players, rather than an industry-wide fix.

Banks all have varying levels of exposures to the bond insurers, whether in muni bond trading or credit derivatives and structured finance. Different insurers also have different capital requirements.

Getting a large number of parties to determine how to share the risk will be incredibly difficult, and instead the banks with the most to lose might bail out individual insurers, analysts said.