Tough times for bond insurers.

This is definitely not a good time to be in the bond insurance business. With large-scale insurers Ambac and MBIA — and with smaller players faring no better — one could well think that in the end the lending crisis has brought to light considerable flaws at the very basis of the American — and indeed global — financial sector. (all links above except the first lead to 6-month stock charts).

The past week has been particularly difficult for all players in the bond insurance game, not just in terms of stock but in terms of core business losses. Ambac alone reported quarterly losses of $3.3B, and as past research has shown the subprime lending crisis seems likely to loom over the economy until well into the fall, which presumably means more large losses for bond insurers in the coming quarters.

Today however saw good news as New York State insurance regulator Eric Dinallo met with the heads of financial institutions and came up with a bank-funded bailout plan which greatly diminishes the insurers’ costs of doing business.

Thus in one week two immediate financial crises have been not so much averted as put off for a while. The American consumer, in the short term, will not be able to keep consuming if his access to credit is reduced. And bond insurers will likely continue to see subprime-related losses well into the fall. Will 2008 be the year of bailouts?

Note: I posted this on Metafilter also.

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