Eliot Spitzer And The "Financial Tsunami". (ABK)(MBI)

Eliot Spitzer, former prosecutor and now governor of New York State, will ape comments made by Deutsche Bank (DB) Chief Executive Josef Ackermann. If bond insurers fail its will create a "financial tsunami".

Spitzer is, of course, right in his comments although he is a little late to the game. As Reuters points out "if insurers are downgraded by ratings agencies, investors that can only hold top-rated bonds may have to sell billions of dollars of securities." To make the situation even more serious, a number of money center banks and brokerages like Citigroup (C) and Merrill Lynch (MER) hold muni-bond instruments which could also lose their value. That may well lead to another round of write-downs among large financial firms.

Spitzer and his friends in government would like Ambac (ABK), MBIA (MBI), and their peers to get capital backing from the large banks. The reasoning is that it is in the sell-interest of the banks to loan money so that their own holdings, which now have high credit ratings, will not be devalued. The argument makes sense until the banks look at their own deficit of capital and wonder if they can lend some out to help the insurance operators.

The government has a solution, a rabbit in its pocket, which it has refused to use. The states or the Feds can guarantee bank loans and take some of the onus from the transactions. If that keep bond insurers "AAA" ratings, the government has very little to lose. It will have prevented a "financial tsunami".

Douglas A. McIntyre