A federal bailout seems especially remote, as Department of the Treasury Undersecretary Robert Steel was quoted this week as saying the Department was not planning to directly intervene since the ongoing credit crisis is a “private market-oriented” situation. Federal Reserve Chairman Ben Bernanke has acknowledged that banks are especially exposed to bond insurers as counterparties and creditors, but went no further than to say that he was aware of the problem and monitoring the developments.
Given the large exposure banks have to the bond insurers, a private industry bailout would seem to be the most likely scenario. However, even that possibility is becoming more doubtful by the day. New York’s Superintendent of Insurance, Eric Dinallo, has reportedly been working behind the scenes with a number of Wall Street banks to rescue several troubled bond insurers. Superintendent Dinallo originally proposed the establishment, by a coalition of banks, of a $15 billion rescue fund. When that idea did not gain traction, Mr. Dinallo suggested individual rescues of the companies. The banks have not yet been inclined to take up Mr. Dinallo’s proposal. With speculation rampant that ratings agencies are on the verge of lowering ratings for several bond insurers, the urgency of a bailout action may only increase in the coming days and weeks. Only time will tell if such a bailout will occur.
