Monoline insurer fears pushed Fed to act

 

The frightening prospect that a major 'monoline' insurer could go bust coupled with another wave of bank losses helped propel the Federal Reserve into taking emergency action.

Bank of America and Wachovia, the second and fourth largest US banks, unveiled quarterly profits that were slashed by more than 90% because of the credit crisis.

Ambac, the world's second largest insurer of bonds, reported a £1.7bn quarterly loss after £2.7bn of credit derivative writedowns.

It was the reduction in the credit rating last Friday of monoline Ambac that sent financial markets into a tailspin and raised fears of widespread contagion in sectors which have previously been largely immune to the credit crunch.

Ambac provides insurance against defaults by companies that have issued bonds, but its weakening balance sheet has prompted speculation that it may struggle to guarantee the payments.

Financial Services Authority chairman Sir Callum McCarthy yesterday told the Treasury Select Committee that the FSA is studyingthe problems that could be caused by a monoline collapse.

Julian Jessop, chief international economist at Capital Economics said: 'The failure of a major monoline would open up a whole new phase of the credit crisis, as insured assets previously assumed to be safely hedged, turn out to be vulnerable after all.'

Bonds issued by a number of well known UK companies, such as Punch Taverns, Mitchells & Butlers, Metronet and even Arsenal football club, have been guaranteed by Ambac.

The downgrade of Ambac triggered a downgrade of the bonds it has insured.

Meanwhile, Bank of America's fourth quarter profit fell 95% to £137m after a £2.7bn writedown for losses on exotic debt instruments.

Wachovia's net income sank 98% to just £26m after £870m of losses. It also set aside £766m for credit losses.

The world's biggest banks have already disclosed more than £60bn of sub-prime writedowns and economists fear there is much more to come.