Wall Street has a problem and over the past few weeks, some of the street's most important bankers and regulators have been trying to come up with a solution.
They're looking for a way to rescue a little-known sector of the financial world called the bond insurance business. It's a business that plays a vital role in the finances of cities and towns across the country, which use bonds to raise money for schools and bridges and sidewalks. And it's being squeezed by the ongoing turmoil in the credit markets.
Bond insurance firms do business by guaranteeing payment on a bond. If you buy an insured bond, and the issuer defaults, you're guaranteed to get all the money that's coming to you.
The trouble is that these firms have recently insured a lot of risky debt products like mortgage-backed securities. These securities have suffered big losses, and the insurance firms have been forced to pay out much more money in claims than they're used to.
There's been no shortage of proposed solutions to the crisis. New York Gov. Eliot Spitzer, for example, has tried to prop up the firms by asking big banks to lend them capital. But banks have been slow to sign off on the arrangement.
The risk right now is that bond insurance firms will get downgraded by the major credit agencies, which means the bonds they insure will be worth less. That means investors who bought the bonds — including a lot of major banks that have already taken big hits — will suffer more losses.