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Bond insurer ACA had its A-grade credit rating slashed to CCC in December. But it was granted a stay of execution until today.

If it can’t raise $1.7bn, it will be insolvent and the first monoline to fall. Is it possible that that will be allowed to happen?

Insolvency would mean ACA reneging on an estimated $61bn of contracts - much of which has been used by banks to hedge their CDO exposures.

Which means Wall Street banks are today instantly looking at further massive writedowns. Merrill Lynch, for example…

As FT Alphaville reported on Thursday, Merrill Lynch used a lot of ACA insurance. Merrill’s writedown figures given yesterday are net.

But unusually, footnoted deep in its SEC filing, Merrill also gave its gross figures. The bank’s gross current super senior CDO exposure is around $30.4bn.

Against that, it has $23.6bn of short positions, thus giving the net figure of $6.8bn. Add on top of that -$1.9bn in trading positions, and the headline figure for super-senior CDO exposure pops out: $4.8bn.

But revisit those $23.6bn of short positions, and what’s worrying is that $19.9bn of it is in insurance contracts with monoline bond insurers. And of that $19.9bn, $6.6bn is with ACA.

In other words, if ACA goes bust today, Merrill’s reported super senior CDO exposure could more than double.

ML has tried, in turn, to hedge against that likely scenario. It’s got a $2bn hedge for a monoline going bust. Light relief.

Merrill’s $6.6bn is, of course, only a fraction of ACA’s total $61bn in insurance on bonds. So who else, we wonder, has hedged their exposures with ACA? It could be anyone - banks net exposures can hide a lot.

Bear Stearns and Lehman have both been speculated about as possible losers in the event of ACA going under. And ACA is only the tip of the monoline iceberg. Going back to Merrill and there’s a further $13.2bn of exposure hedged with an unspecified number of other monolines - likely to include MBIA or Ambac.