Spitzer says bond insurance problem could be 'financial tsunami'

New York governor Eliot Spitzer may be a lawyer by training, but he must harbor secret aspirations of becoming a financier. He will tell Congress today that the problems at bond insurance companies could become "financial tsunami" if they are not fixed.

Spitzer has a point. 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, lifting borrowing costs for cities and consumers alike." Banks might also have to write-down the value of any of these bonds that they hold on their balance sheets.

The debate now is whether the private sector should handle this on its own with banks including Citigroup (NYSE: C) providing financing to insurance firms such as Ambac (NYSE: ABK). The banks already have credit problems that could make those investments difficult.

If Spitzer truly wants to avoid what be feels will be a catastrophe he needs to say that New York State will provide the bond insurers some financial guarantees and capital. Then the banks are likely to come in.

Douglas A. McIntyre is an editor at 247wallst.com.