Bond Insurers' Woes Hit Global Market

Bond insurers are feeling the pain of the subprime mortgage mess. Four bond insurers' troubles are now impacting the global financial markets. David Wessel, economics editor at The Wall Street Journal, discusses the impact with Renee Montagne.

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RENEE MONTAGNE, host:

And the mortgage meltdown has caught up with yet another group of players: the very specialized insurance companies you might never had heard of but whose troubles are now roiling global markets. They are bond insurers, and here to walk us through why their troubles matter is David Wessel. He's economics editor at the Wall Street Journal. Good morning.

Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning, Renee.

MONTAGNE: What exactly did these companies do?

Mr. WESSEL: Well, you know, this is a little bit like reading a mystery and you turn to the next chapter and there's a whole new character who hasn't been identified or introduced before. For decades, these bond insurers had a very sleepy but reliably profitable business. They sold insurance against defaults on bonds issued by cities, and states, and counties, and so forth. The cities and states paid an insurance fee and investors settled for a lower interest rate because the bonds were guaranteed.

The bonds almost never went bad and when they did, the losses were minimal, but the growth and profits were sluggish. So these companies in their wisdom decided to move into a hot new business in search of higher profits. And that business was selling insurance on very complicated securities that are backed by home mortgages. And that has proved to be a very expensive mistake.

MONTAGNE: And how expensive?

Mr. WESSEL: Well, we're actually still finding out. One of the problems here is we don't know how big a hole these companies have dug, but here's one example. One of the companies is known as MBIA, and so far they've lost $714 million on securities backed by mortgages. That's nearly as much as they've paid out in claims over their entire 36-year history.

MONTAGNE: How, though, is anyone outside the small world of bond insurers affected by this?

Mr. WESSEL: These insurance companies can make a go of their business as long they have triple A, gilt-edge ratings from the rating agencies. They need that because without that, no one will trust that they can stand behind the bonds. Those ratings are now in danger. If they lose their ratings, we're learning, they are a - one important chain in a very complicated global financial system is broken. Because they guarantee the payments on more than $2 trillion worth of securities, and because of this insurance, everyone from governments to companies and so forth can raise capital more cheaply.

If that chain is broken, everybody who holds a bond that is backed by one of their guarantees will have something that's worth a little less, and they'll have to mark that down, and that'll lead them to be more reluctant to lend, and so forth, and you could end up with a really debilitating credit crunch.

MONTAGNE: So now that, in a sense, this has come out, sort of the other shoe, what's likely to be done?

Mr. WESSEL: Well, you're right, it is another shoe. Unfortunately, we seem to be dealing with a centipede here. Every time we get one shoe fall off, another one comes. But what's happening now is the insurance commissioner in New York, with some help from the New York Federal Reserve Bank and the U.S. Treasury, are basically trying to get other companies on Wall Street to invest in these insurance companies so they have the capital they need to hold on to their triple A ratings and the music can keep going.

MONTAGNE: And what would you call this? Is it a bailout?

Mr. WESSEL: Look, you know, bailout is one of these words that seems to have a very pejorative meaning. These companies are vital to the financial system. Other banks and investment banks and government agencies who have a stake in the financial system say, if we all just let nature take its course, we're going to have a huge problem here. Is there something we can do that's in our own interest collectively to save them? After all, mortgage defaults are rising, home prices are falling, the rating agencies are now saying that losses on investments tied to mortgages are going be far worse than was believed a few months ago.

I mean Standard and Poor's last week said that such losses altogether could top $265 billion. That's something like the size of the entire economy of Norway. So at a time like this, you can't have any vital part of the system fail. And so everybody's trying to figure out a way that they can make money, but save these entities from collapse.

MONTAGNE: David, thanks very much.

Mr. WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor at the Wall Street Journal.

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