MBIA Soothes Street In Marathon Call

Standard & Poor's did not, however, match Fitch's downgrade of Ambac from triple-A to double-A but has the firm on watch for a possible downgrade. Fitch has been viewed as aggressive in its ratings actions, but S&P and Moody's Investors Service, which has also threatened to downgrade MBIA, hold more weight since their ratings are typically the two that investors and buyers of rated securities abide by.

Losing their triple-A ratings would mean Ambac and MBIA would be limited as to the sorts of business they can underwrite. But more to the point, a downgrade would limit the scope of their business, since the universe of deals for a double-A rated firm is smaller slice of the monoline insurance pie than that of a higher-rated firm. Adding to that dilemma is the likelihood that a host of firms including FGIC, Ambac and MBIA all could be jockeying for that much smaller slice.

Competition from new entrants also will prove a problem.

Billionaire investors Wilbur Ross and Warren Buffett are likely to serve as rivals to the insurers by creating new outlets to insure debt, as Federal Reserve cuts create an attractive environment to underwrite new business. Attracting new business is the challenge. Ross has toyed with the idea of investing in Ambac or buying the guarantor outright, according to media reports, but on Thursday he fell short of revealing his intentions, other than to predict that he expected a shakeout among the guarantors during a public event.

The flap surrounding monolines has compelled New York Insurance Superintendent Eric Dinallo to try and orchestrate a bailout of the sector by encouraging investment banks to provide some support capital that could either bolster the insurers or be used to form a reinsurance pool to assume some of the liabilities on their books.

An accord among some of the challenged banks, such as Merrill Lynch(MER) and Citigroup(C) might be difficult to achieve, especially since those banks have suffered their own massive writedowns on subprime-related bets.

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