Bond Insurers Contemplate Wiping Out $125 Billion of insurance on Debt Securities

New York–Bond insurers–including Ambac and FGIC, which are headquartered in New York, and Armonk, N.Y.-based MBIA–are considering eliminating $125 billion of insurance on risky debt securities to reduce the threat of financial damage, the Financial Times said.Talk of “commuting” the insurance contracts became more pressing after last week’s bond insurance ratings downgrades. A plan could take months to form; however, any agreements involving the value of the credit default swaps sold to banks by bond insurers could affect the entire financial system, which is struggling to establish values for derivatives and complex bonds linked to mortgage-backed securities, the Times said.Bond insurers issued credit default swap contracts to guarantee payments on collateralized debt obligations–complex debt securities frequently backed by mortgages.Banks with the most exposure–including Citibank, UBS  and Merrill Lynch–have already taken writedowns related to the value of collateralized debt obligations linked to complex debt securities, which have a nominal value of roughly $125 billion, according to Standard & Poor’s.