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Bond Insurers, Banks: Partners in Misery

S&P ratings explain how credit downgrades of financial guarantors like MBIA and Ambac could force banks to take big writedowns

Recent credit-rating downgrades of bond insurers such as Financial Guaranty Insurance and ACA Financial Guaranty (ACAH)—and the prospect that other industry players including MBIA (MBI), Ambac Assurance (ABK), and Security Capital Assurance (SCA) could lose their AAA ratings—prompt questions about the effect of such developments on both commercial and investment banks.

Of course, successful capital-raising efforts by the bond insurers would eliminate the need to focus on the potential effect of downgrades on financial institutions. In the absence of additional capital, however, it is useful to think about the possible ramifications of downgrades, which could affect the $2.5 trillion of obligations guaranteed by the bond insurers.