Bond insurers such as Ambac, MBIA and FGIC are talking to banks about wiping out $125bn of insurance on risky debt securities, in what could be the only way to limit the financial damage surrounding the so-called monolines. Discussions about “commuting” these insurance contracts, which were sold by bond insurers to banks in the form of credit default swaps, have acquired renewed urgency amid a rash of ratings downgrades in the monoline sector last week. If agreements are struck about the value of these CDS contacts – and the discussions could take months – it would have a significant effect on the entire financial system.
