MBIA dismisses insolvency speculation after mortgage-related bonds losses

Monoline insurer lost $2.3bn in fourth quarter; Markets in worst start to year for five years

The chief executive of MBIA, the bond insurer which is fighting for its survival, has lashed out at "fearmongering" by analysts and investors who predict it could collapse and trigger a new wave of credit losses across Wall Street.

Gary Dunton said MBIA had enough money to cover two years' of guarantees on mortgage-related bonds, and was in the process of raising even more cash. He angrily dismissed speculation that the company could become insolvent, and said it was best-positioned to maintain its gold-plated triple-A credit rating. Mr Dunton's reassurances sparked a global stock market rally.

Share prices were buffetted last month by fears that a credit rating downgrade for MBIA and its peers – who together insure $2.4trn (£1.2trn) of bonds – could trigger a crisis for the financial system. MBIA said late on Wednesday it lost $2.3bn in the final three months of 2007, mainly because of projected losses on mortgage-related bonds. Across the financial system, hundreds of billions of dollars have been wiped off the value of such bonds, because Americans are defaulting on the sub-prime mortgages that underlie them.

Wall Street banks have written off more than $100bn, but the figure would be even higher if they had not taken out insurance with MBIA, its rival Ambac and other "monoline" insurers. When monolines lose their triple-A credit rating, banks are forced to admit their insurance could be worthless.

For example, the ratings agency Fitch downgraded Ambac's credit rating last week and analysts began forecasting Merrill Lynch would have to take a $1bn write-down as a result. Meredith Whitney, the respected financial sector analyst at Oppenheimer & Co, predicted Wall Street could suffer between $40bn and $70bn losses if the major monolines lose their triple-A ratings, but that almost half that would be concentrated in three firms: Merrill, Citigroup and UBS.

"Among the myriad of negatives that surround financial stocks today, we see no issue more critical than the fate of the monoline insurers," Ms Whitney told clients. "Many investors are of the belief that the fourth quarter was a 'kitchen sink' for all of the outstanding capital hits this credit cycle. When it becomes clear (as we think it will) that more charges are on the horizon, we believe the market will take another turn for the worse."

Ms Whitney predicted that neither the government nor the other Wall Street banks would come to the monolines' rescue, despite the negotiations being organised by the insurance industry regulator in New York.

Meanwhile, Bill Ackman, the hedge fund manager who has questioned the creditworthiness of the monoline insurers for five years, is predicting that both MBIA and Ambac will ultimately lose $11.6bn on mortgage-related derivatives.

Mr Dunton called that "fear mongering" by people with an interest in seeing MBIA shares fall, and he said the 80 per cent collapse in the company's value since last summer has been an "over-reaction". Chuck Chaplin, MBIA's chief financial officer, added: "We're going to work to capitalise the company to the point where there are no questions in the market from serious analysts, investors or customers about our capital position or our intent."

Stock markets around the world fell early yesterday following the downgrade by Fitch of a much smaller monoline insurer, FGIC. But Mr Dunton's comments reversed a 200-point loss by the Dow Jones Industrial Average in the US. The index closed 207.5, or 1.7 per cent, higher at 12,650.4. The FTSE 100's late rally – ending up 42.5 at 5,879.8 – spared the UK index from recording its worst January ever.