The Wall Street Journal-20080130-Credit Crunch- Good Plan- but Who Will Pay-- Street Firms Wrangle Over the Particulars Of Bond-Insurer Aid

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Credit Crunch: Good Plan, but Who Will Pay?; Street Firms Wrangle Over the Particulars Of Bond-Insurer Aid

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Regulators are pursuing a plan to shore up troubled bond-insurance companies -- linchpins of modern debt markets. But the Wall Street firms that would put up cash are already wrangling over how much each should have to pony up.

Talks are preliminary, and a deal is far from certain at this point, according to people close to the negotiations. Already some firms are raising questions about the various plans, offering insight into just how hard it will be for regulators to broker a bailout.

Currently, regulators and bankers are bandying around three or so possible solutions. But the main stumbling blocks are these questions: Is a plan even needed? And if so, how will the tab for each bank be calculated?

Last week, New York state insurance regulators met with banks in hopes of structuring a bailout of some of the nation's biggest bond insurers, including Ambac Financial Group Inc. and MBIA Inc. Bond insurers are at the center of the mortgage-debt storm because they have guaranteed billions of dollars of financial instruments now going sour. If the mortgage-market tumult results in downgrading of the bond insurers, a new wave of write-downs on Wall Street are likely.

This also has spillover into the municipal-bond market because the insurers cover many bonds issued by local governments to finance local roads, schools and other projects. If triple-A insurance is harder to get, it could increase the cost of borrowing for those governments.

Senior executives of Wall Street's top firms, including Morgan Stanley, Merrill Lynch & Co., Citigroup Inc. and Goldman Sachs Group Inc., met last week with New York State Insurance Superintendent Eric Dinallo. Since then, the department has hired Wall Street firm Perella Weinberg Partners LP, run by former Morgan Stanley executive Joseph R. Perella, to help put together a rescue plan.

Among the possible solutions being formulated are capital infusions from outside investors or the banks themselves. The Wall Street firms could also arrange to provide a massive line of credit to the bond insurers, giving those firms a cushion of cash.

Another possibility is that the banks could fund a newly created firm that would assume some of the risks or liabilities on bond insurers' books -- an arrangement known as reinsurance. This could free up capital to the insurers but is unattractive to some Wall Street firms wary of taking on unpredictable liability.

The first stumbling block, said one senior Wall Street executive, is that no one has yet put a figure on just how big the big the bailout would need to be. Figures so far range from $3 billion to $15 billion.

There has been discussion between regulators and the Wall Street firms that each bank should contribute the same amount, which has appeal because of its simplicity.

However, it quickly gets complicated, given that the banks themselves have differing levels of risk exposure to the bonds in question and also have differing abilities to provide cash. Calculating how much each should put up on a pro rata basis could be complicated and spark disagreement.

Not everyone thinks it will be tough to find an acceptable formula. "As long as it was fairly objective and accurate, I don't think that would be a problem," says one person familiar with the matter.

Still, one Wall Street executive said a pro rata solution will have to look not only at how much exposure each Wall Street firm has to each bond company, but also at which insurance company the exposure is to, because some firms need more money than others to help protect their triple-A ratings.

Another wrinkle: Any downgrade will affect the business of issuing new municipal bonds. Therefore, some firms involved in talks with Mr. Dinallo's office are arguing that companies with a big muni-bond business should kick in more.

Several executives involved in the talks say federal officials may need to get involved if a deal is to be struck. But so far, neither the Treasury nor the Federal Reserve has taken an active role.

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David Enrich contributed to this article.