Insurer Woes Could Hit Banks

ACA, for one, guarantees some $60 billion of CDO securities. The problems with monoline insurers are not insignificant, because in total such firms guarantee trillions in debt securities.

JPMorgan analyst Andrew Wessel also told Bloomberg in a phone interview Wednesday that ACA may be the first monoline insurer to get downgraded. The downgrade worries have sent ACA shares to 82 cents, down by a whopping 25% in Wednesday's trading.

A call to ACA CEO Alan Roseman in New York was not immediately returned.

Fitch analyst Thomas Abruzzo told TheStreet.com that the rating agency, which does not cover ACA, has been closely tracking monoline companies as a group and has many of the firms on ratings watch for the next few weeks. Abruzzo said Fitch's rating moves, if any, on some of the names would allow the insurers to shore up their balance sheets, which could include the monolines obtaining reinsurance or obtaining external funds.

Also under the microscope are monoline insurance firms Ambac Financial Group(ABK Quote) and closely held insurance firm FGIC.

Firms such as Merrill and other big banks can ill afford to take more hits related to subprime securities.

Merrill saw the departure of CEO Stan O'Neal after the securities firm said it would face some $8.4 billion in writedowns on leveraged loans and asset-backed securities. NYSE Euronext (NYX Quote) chief John Thain will replace O'Neal on Dec. 1.