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Last Updated: Thursday, 7 February 2008, 10:42 GMT
Fed concern at sub-prime insurers
Federal Reserve Chairman Ben Bernanke
The US economy has been shaken by the sub-prime crisis
Federal Reserve boss Ben Bernanke is keeping an eye on bond insurers, which guarantee the products at the heart of the US sub-prime mortgage crisis.

Mr Bernanke said that the insurers' problems could have an adverse effect on financial markets and the economy.

Bond insurers are reeling after the value of the US mortgage-backed investments they had guaranteed fell.

Analysts fear the insurers will not be able to pay out, forcing banks to announce another big round of losses.

Ratings fears

Bond insurers, also known as monolines, make money by insuring against loans going wrong.

If the issuer of a bond goes bust, they guarantee to step in and make interest rate payments and repay the principal.

This makes borrowing cheaper for financial institutions and companies.

MBIA, the largest US bond insurer, said on Wednesday it would raise $750m (384m) by issuing new shares, after it made a net loss of $2.3bn in the three months ending 31 December.

The capital should help it retain its top credit ratings crucial for its business.

However, rating agency Fitch said MBIA's main bond insurance unit could lose its top triple-A rating even with new capital, because it faces big potential losses after guaranteeing repackaged sub-prime debt.

'Adverse effects'

If their credit ratings are cut, it could make it harder or more expensive for bond insurers to raise the money to pay banks and other institutions.

"Given the adverse effects that problems of financial guarantors can have on financial markets and the economy, we are closely monitoring developments," Federal Reserve Chairman Ben Bernanke said in a letter.

The 4 February letter was to Paul Kanjorksi, the chairman of the House of Representatives subcommittee that overseas capital markets.

He will hold a hearing on the need for reform to the sector on 14 February.

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