Bond Insurers Under Assault

Time seems to be running short for monolines, even in light of a bailout package being coordinated by Dinallo. Sources tell TheStreet.com that the New York-led bailout initiative may be favoring a company-by-company rescue, since the monolines are not all equally stressed. Such a plan, however, might still take a considerable amount of time to arrange, sources say.

A call to Dinallo's office was not immediately returned.

Billionaire investors Wilbur Ross and Warren Buffett have both been pegged as possible saviors for the industry. But both savvy investors appear more likely to serve as rivals to the insurers by creating new outlets to insure debt. Moreover, recent rate cuts by the Federal Reserve, which slashed rates by 50 basis points to 3% on Wednesday, is creating an attractive environment for monolines, whose primary business is providing insurance on municipal debt.

A call for comment from Ross and Buffett were not immediately returned.

The U.K.'s Evening Standard last week reported that Ross was in serious discussions with Ambac about a buyout, but so far nothing has materialized. The information Ackman distributed Wednesday, while it may serve the activist's own interest, may also give Ross reason to pause about providing any fresh capital to distressed guarantors.

'As Good Dead As Alive'

Private equity firm Warburg Pincus late last year provided about $1 billion in funds for MBIA. The Armonk, N.Y.-based insurer issued 14% yielding notes that have fallen in value to about 70 cents on the dollar, but Warburg remains committed to the its MBIA investment, according to people familiar with the situation. Warburg on Wednesday sent MBIA an initial $500 million installment as a part of its agreement. The private equity shop will support an additional $500 million rights offering that also is expected to be shopped soon. Warburg speculates that there is still a tremendous amount of interest to own debt in bond insurers.

A person familiar with Warburg Pincus's thinking referred to Ackman's recent report as a misleading interpretation of the guarantor's position. "The implication that if you're not triple-A, you're bankrupt is idiotic," says the person.

The executive says Warburg's long-term investments in MBIA suggests that the private equity firm, while certainly hoping that big guarantor can emerge from the turmoil, realizes its MBIA investment is just as good dead as it is alive. The company can be profitable in runoff, the process in which it collects payments on its existing portfolio and underwrites no new policies, the source says.

A Warburg spokesman declined to comment.