Ben Bernanke, chairman of the US Federal Reserve, yesterday acknowledged that the bank is worried about the impact of an impending implosion of bond insurers on the US economy.
In a letter published yesterday, Mr Bernanke said that the Fed is “closely monitoring” problems with US bond insurers: “Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments,” Mr Bernanke said in the letter to Paul Kanjorski, a Pennsylvania Democrat who chairs a House of Representatives sub-committee that oversees capital markets and the insurance industry.
Mr Bernanke was joined in his concerns by David Viniar, the chief financial officer of Goldman Sachs, who gave warning yesterday that some key mortgage bond insurers could collapse. He predicted that Wall Street bailouts would be able to satisfy only some of the need for extra cash.
Speaking at a Credit Suisse investor conference in Naples, Florida, Mr Viniar said that he expected some so-called monolines to receive cash injections as banks with a stake in their fortunes worked to prop them up.
Yet Wall Street would be able to solve only some of the bond insurers’ problems, he said. “You will see some solutions to what’s going on. Over the next few weeks, months, there will be some solutions, but not all solutions. You have a number of companies who are involved in a lot of different things, so I think it’s going to be more complicated than the industry bailout of the Long Term Capital Management hedge fund in 1998, where you just had one company and ten banks.”
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His comments came as MBIA, the bond insurer, said that it was seeking to raise $750 million by issuing new shares to shore up its balance sheet. The fundraising came after Fitch, the credit-rating agency, warned that it may strip the main unit of MBIA of its top AAA rating because of its exposure to sub-prime-backed bonds.
American bond insurers, which guarantee the interest and principal payments on the securities that they underwrite in the event of a default, face a surge in claims on sub-prime mortgage bonds as defaults rise on the underlying home loans. If they are unable to meet these claims, the value of the bonds that they underwrite would fall, prompting another round of multibillion-dollar writedowns at some of Wall Street’s biggest banks.
Those banks are trying to establish whether it is cheaper to prop up the bond insurers through a capital injection or to suffer the losses that their implosion would bring.
In the most high-profile rescue attempt, a consortium of eight banks, including Barclays and Royal Bank of Scotland, is working to orchestrate a bailout of Ambac. The consortium, which is working with the New York State Insurance Department, will also consider other capital injections after it has dealt with Ambac.
Separately, Mr Viniar declared Goldman’s eagerness to invest in the mortgage market. “There will be a purchasing of distressed assets and, at the right price, we will be buyers,” he said.