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Bond Insurers' Woes Hit Global Market

: the very specialized insurance companies you might never had heard of but whose troubles are now roiling global markets. They are bond insurers, and here to walk us through why their troubles matter is David Wessel. He's economics editor at the Wall Street Journal. Good morning.

: Good morning, Renee.

: What exactly did these companies do?

: The bonds almost never went bad and when they did, the losses were minimal, but the growth and profits were sluggish. So these companies in their wisdom decided to move into a hot new business in search of higher profits. And that business was selling insurance on very complicated securities that are backed by home mortgages. And that has proved to be a very expensive mistake.

: And how expensive?

: Well, we're actually still finding out. One of the problems here is we don't know how big a hole these companies have dug, but here's one example. One of the companies is known as MBIA, and so far they've lost $714 million on securities backed by mortgages. That's nearly as much as they've paid out in claims over their entire 36-year history.

: How, though, is anyone outside the small world of bond insurers affected by this?

: If that chain is broken, everybody who holds a bond that is backed by one of their guarantees will have something that's worth a little less, and they'll have to mark that down, and that'll lead them to be more reluctant to lend, and so forth, and you could end up with a really debilitating credit crunch.

: So now that, in a sense, this has come out, sort of the other shoe, what's likely to be done?

: Well, you're right, it is another shoe. Unfortunately, we seem to be dealing with a centipede here. Every time we get one shoe fall off, another one comes. But what's happening now is the insurance commissioner in New York, with some help from the New York Federal Reserve Bank and the U.S. Treasury, are basically trying to get other companies on Wall Street to invest in these insurance companies so they have the capital they need to hold on to their triple A ratings and the music can keep going.

: And what would you call this? Is it a bailout?

: I mean Standard and Poor's last week said that such losses altogether could top $265 billion. That's something like the size of the entire economy of Norway. So at a time like this, you can't have any vital part of the system fail. And so everybody's trying to figure out a way that they can make money, but save these entities from collapse.

: David, thanks very much.

: You're welcome.

: David Wessel is economics editor at the Wall Street Journal. Transcript provided by NPR, Copyright NPR.

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