If muni-bond insurers like Amback (NYSE: ABK) and MBIA (NYSE:MBI) are forced to break into two pieces, some banks could be badly hurt. The halving of the firms would leave the muni piece of the businesses in one set of companies and the more risky structured investments pieces to operate on their own.

According to Reuters, if insurer FGIC is made into two companies "investment banks that traded with FGIC would be forced to take losses." Those banks probably include Citigroup (NYSE:C), Societe Generale, and UBS (UBS).

Reuters reports further that "banks are generally facing the risks of big writedowns from hedges they put on with bond insurers."

Douglas A. McIntyre

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