Insurer Woes Could Hit Banks

More pain may be in the offing for investment banks such as Merrill Lynch(MER Quote), who hold hard-to-value mortgage paper.

Merrill may be forced to write down as much as $3 billion in so-called collateralized debt obligations, or CDOs, which have seen their values fall fast and hard because of securities tied to bad mortgage debt, according to Lehman Brothers analyst Roger Freeman.

A Merrill spokeswoman declined to comment. But at the heart of the problem is an anticipated downgrade of monoline bond insurer ACA Capital Holdings(ACA Quote), which could set off a chain of downgrades culminating in big banks being forced to put bad mortgage paper back on their books. ...