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Tuesday, February 19, 2008

Moody's: Bond Insurer Downgrades May Cost Banks Billions

by Calculated Risk on 2/19/2008 03:42:00 PM

From Dow Jones: Bond Insurer Woes May Cause $7-$10 Bln Hit For Banks: Moody's

Downgrades of bond insurers could require banks and securities firms to increase reserves by between $7 billion and $10 billion, rating agency Moody's Investors Service estimated on Tuesday.

If trouble in the so-called monoline business gets even worse, banks may have to set aside $20 billion to $30 billion to boost reserves covering counterparty risks, the agency added.
About 20 banks and securities firms have roughly $120 billion worth of hedges with financial guarantors on CDOs that contain asset-backed securities, Moody's said on Tuesday.

"We are currently evaluating these individual exposures to assess how institutions can absorb the additional counterparty reserves that might be required if one or more financial guarantors were downgraded," the agency said in a statement.
The headline states the obvious, but this gives an idea of the size of the problem according to Moody's.