STEVE INSKEEP, Host:
NPR's Jim Zarroli reports.
JIM ZARROLI: The bond insurance business is one of those little-known but vital corners of the financial world.
KATHLEEN SHANLEY: Basically, firms such as MBIA and Ambac have provided a security blanket for investors.
ZARROLI: Bond insurance is a huge business. Two and a half trillion dollars worth of bonds are insured, and until recently it was a very safe business. The firms hardly ever had to pay a claim because they dealt mainly with county and municipal governments that rarely defaulted.
SHANLEY: And the problem was, that was a low-margin business, and they moved into some of these more exotic securities that have turned out to be more risky than people originally anticipated.
ZARROLI: The bond insurers began writing policies to cover a lot of the new highly structured debt products like mortgage-backed securities. Now that the mortgage business is in such trouble, a lot of these securities are suddenly worth less, and these insurers are unexpectedly having to shell out a lot of money for claims, says analyst Rob Haines of CreditSights.
ROB HAINES: We've seen a huge increase in the expected losses that we're going to see on a lot of these structured products, far in excess of what these companies had modeled and far in excess of the capital that these bond insurers hold.
ZARROLI: This week, regulators in New York have been huddling with the firms and the banks to try to find a way out of this quagmire. David Neustadt, a spokesman for the state insurance superintendent, said the problem won't be solved overnight.
DAVID NEUSTADT: Clearly, it's important to resolve issues related to the bond insurers as soon as possible. But you must understand that these are very complicated issues. It involves a number of parties, and any effective plan is going to take some time to finalize.
ZARROLI: One idea reportedly under consideration is a $15 billion bail-out package. Neustadt wouldn't comment on that, but analyst Rob Haines said such a package would buy the bond insurers some time.
HAINES: What the $15 billion would do is it would prop up the companies for the near term or immediate term, and it will allow the companies to continue to write(ph) business over the next three to four years as these losses came in.
ZARROLI: Jim Zarroli, NPR News, New York.