Business and Finance

NEW YORK - MBIA Inc. reported write-downs of $3.5 billion on souring credit markets Thursday, exacerbating concerns that rising costs could squeeze local governments as well as slow any recovery for big banks.

Continued weakness in the bond insurance market may put struggling banks in a precarious position. Banks, which have reduced portfolio values by more $140 billion during the second half of 2007 in a deteriorating mortgage market, might be forced to take further write-downs tied to bonds insured by companies like MBIA.

MBIA said it is considering new options to raise capital.

The insurer lost $2.3 billion in the fourth quarter, or $18.61 per share, compared with earnings of $181 million, or $1.32 per share, during the same period the previous year.

Analysts polled by Thomson Financial, on average, forecast a loss of $2.97 per share for the quarter. Shares of MBIA fell 4.5 percent, or 63 cents, to $13.33 at the open of trading Thursday.

During the quarter, MBIA reduced the value of its credit portfolios by $3.5 billion, reducing earnings by $18.04 per share. The losses were primarily tied to the reduced value of collateralized debt obligations in its insured portfolio.

So-called CDOs are complex financial instruments that combine various forms of debt.

MBIA also took a $713.5 million pretax loss on its exposure to rising delinquencies and defaults among home equity products. Of the $713.5 million, $100 million was placed in reserve to cover potential future losses.

The beleaguered bond insurer also reduced the value of its 17.4 percent stake in reinsurer Channel Re to $0 from $85.7 million.

"The effect of these reserving and impairment activities on our capital position will be more than offset by the successful completion of our capital plan, which will increase our capital position by well over $2 billion," Gary Dunton, MBIA's chairman and chief executive, said in a statement.

MBIA raised more than $1.5 billion in recent months to try and maintain its critical "AAA" rating free credit report instantly. The company raised $1 billion through the offering of surplus notes and another $500 million through a direct investment by private equity firm Warburg Pincus, which closed Wednesday. Warburg Pincus has also pledged to backstop an additional $500 million rights offering.

Oppenheimer & Co. analyst Meredith Whitney said banks' could take up to $70 billion in additional write-downs because of the faltering bond insurers.

Struggles at bond insurers could also make it prohibitively expensive for municipalities to raise money for everything from street repairs to playgrounds.

The bond insurance market is in the midst of a major upheaval after ratings agencies began reviewing their operations during the fourth quarter. Due to rising delinquencies and defaults on mortgages, ratings agencies believe bonds and securities backed by those troubled loans will increasingly default as well, forcing bond insurers to pay out claims.

Bond insurers make principal and interest payments when issuers default. Under extreme loss scenarios, ratings agencies believe many bond insurers do not have enough cash available to pay out claims, which has forced the companies to either raise new capital or face a downgrade from the "AAA" financial strength rating.

Bond insurers essentially need "AAA" ratings to book new business.

Fitch Ratings already downgraded Ambac Financial Group Inc., Security Capital Assurance Ltd. and most recently Financial Guaranty Insurance Co. Both Moody's Investors Service and Standard & Poor's said they are currently reviewing ratings on bond insurers, including MBIA.

For the full year, MBIA lost $1.9 billion, or $15.22 per share, compared with earnings of $819.3 million, or $5.99 per share, in 2006.

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