By Hilary Kramer

When you think about the root cause of the financial debacle of the last years, one word jumps out: mortgages. Depending who you listen too, there were too many loans, too little collateral, overaggressive lending all playing a part.

However, with the economy now improving, the U.S. housing markets are beginning to gain a firmer footing. Those companies offering protection to the participants in this market, and that had gotten hammered over the last few years, are now in a position to rise from their lows.

One such firm is The PMI Group (PMI).

MOST NOTEWORTHY: Infinera, Dawson Geophysical and Electro-Optical Sciences were today's noteworthy initiations:

• Thomas Weisel said Infinera (NASDAQ: INFN) has unique technology that will result in a sustained competitive differentiation, increases customer diversification and improving margins. The firm started shares with an Overweight rating and $13 target.
  
• Dawson Geophysical (NASDAQ: DWSN) was initiated with a Hold rating and $72 target at Jefferies, as they believe the stock is fairly-valued at current levels.
  
• Jesup & Lamont initiated Electro-Optical Sciences (NASDAQ: MELA) with a Buy rating and $8 target. The believes MELA's Melafind is a breakthrough technology for the diagnosis of melanoma.

OTHER INITIATIONS:

• Piper resumed coverage of PMI Group (NYSE: PMI) with a Neutral rating and $6 target.
  
• Susquehanna initiated Immunocor (NASDAQ: BLUD) and Given Imaging (NASDAQ: GIVN) with Positive ratings.
  
• Merrill started Liberty Entertainment (NASDAQ: LMDIA) with a Neutral rating.

Barclays analysts say banks that obtained $72 billion in funding to replenish capital depleted by subprime-related losses may need another $143 billion in capital infusions if credit rating agencies downgrade bond insurers several levels, Bloomberg News reported Friday.

Barclays analyst Paul Fenner-Leitao Banks wrote in a research report published Friday that banks will need at least $22 billion if bonds covered by insurers MBIA (NYSE: MBI) and Ambac (NYSE: ABK) are cut one level from the current AAA and six times that if they are cut four levels, Bloomberg said. The capital amount is based on Barclays' estimates that the banks hold as much as 75% of the $820 billion of the structured securities guaranteed by bond insurers.

Meanwhile, the markets awaited word on New York Insurance Superintendent Eric Dinallo's meeting with banks on a bail-out package for bond insurers. Shares of some key bond insurers fell after Dinallo issued a statement that the negotiations were complicated and would take time, leading some in the market to doubt the New York agency's ability to marshal private resources for the initiative.

MBIA fell 79 cents to $13.61, Ambac gained 15 cents to $11.48, PMI Group (NYSE: PMI) rose 17 cents to $8.97, and MGIC Investment (NYSE: MTG) declined 6 cents to $16.68.

Key regulators at the New York State Insurance Department met Wednesday with U.S. banks to discuss raising new capital for bond insurers, a department spokesman said, Bloomberg News reported late Wednesday afternoon.

Talks in New York with unnamed banks are part of New York Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, New York State Insurance Department spokesman Andrew Mais told Bloomberg News.

Market rallies on insurer meeting

Word of the meeting sparked a remarkable 600-point reversal rally on Wall Street, with the Dow closing the day up 298.98 points to 12270.17. The Dow had been down more than 300 points earlier in the day. The broader markets also rallied.

U.S. Federal Reserve Chairman now has more leeway to reduce interest rates further and quicker, after concluding that inflation concerns have subsided enough, Bloomberg News reported Wednesday.

However, economist David Wang told BloggingStocks Wednesday that although there's a tendency among some media outlets "to fixate on the Fed and interest rates," investors should concentrate on the multiplicity of tools at the Fed's disposal, as well as the global effort that Wang believes is necessary to prevent both a U.S. recession and a major slowdown in global growth.

"Look for the Fed's term auction facility to play just as important a role as the Fed's rate cuts in the months ahead," Wang said.

Last fall, the Fed established a term auction facility to provide short-term liquidity to banks. Bernanke has underscored that the term auction facility will remain open, "for as long as necessary."

Given the U.S. market's 400-point sell-off in its initial minutes of trading, "a Dow close down just 300-points would look like a moral victory" according to one economist.

"All things considered, from a market standpoint, a 300-point down day is a relatively small consequence," economist David H. Wang told BloggingStocks Tuesday.

Amid the sell-off, the U.S. Federal Reserve, in an emergency monetary policy action, cut key interest rates Tuesday morning - - cutting both the Fed Funds rate and the discount rate by 75 basis points. The Fed cut the Fed Funds rate to 3.50% and the discount rate to 4.00%.

Larger matter: mortgage insurers

Of utmost importance, in Wang's interpretation, is the health and fate of mortgage insurers, primarily MBIA (NYSE: MBI), and Ambac (NYSE: ABK), but also PMI Group (NYSE: PMI), and MGIC (NYSE: MTG).

Wang said the mortgage insurers "form a critical foundation in mortgage insurance, and as a result, in the mortgage process."

"A failure by MBIA or Ambac would mean several banks would not receive insurance payments for mortgages that go into default, substantially reducing the asset values of those banks," Wang said. "That would prompt another market sell off, possibly resulting in a failure by one or more banks."

TheStreet.com's Jim Cramer says the price of no more rate cuts from the Fed would be foreclosures. Lots of them.

Have you noticed that MBIA (NYSE: MBI) (Cramer's Take) and Ambac Financial (NYSE: ABK) (Cramer's Take) are just being crushed today?

More important, has the Fed noticed?

Lots of people have asked me where I came up with the $500 billion loss number I've been mentioning. Here's the deal: A large group of people, 50% of the 14 million homebuyers, are going to default on their "2 and 28" adjusted-rate mortgages now that they are being reset. Many of these people paid for the 2% with home equity loans that they can't pay back.

Think of those millions of no-money-down ads. Those worked! These people can't pay now that the resets are in the house. Others, allegedly AAA borrowers, will find themselves defaulting, and the insurance won't be paid. That's horrible, but that's what the stocks are saying.

MOST NOTEWORTHY: Mattel, Volvo, PMI Group, Mosaic and Diamond Foods were today's noteworthy upgrades:

• Oppenheimer upgraded shares of Mattel Inc (NYSE: MAT) to Buy from Neutral citing valuation, strong 2008 product line-up, and expected organic sales growth.
  
• Goldman upgraded shares of Volvo (NASDAQ: VOLV) to Buy from Neutral on valuation as they believe the company's prospects for earnings are not priced into shares. Volvo was added to the firm's Conviction Buy List.
  
• PMI Group's (NYSE: PMI) rating was raised to Outperform from Market Perform at Piper Jaffray on valuation.
  
• Citigroup upgraded shares of Mosaic Company (NYSE: MOS) to Hold from Sell to reflect their increased commodity price forecasts.
  
• Diamond Foods Inc (NASDAQ: DMND) was upgraded to Buy from hold at BB&T Capital on valuation.

OTHER UPGRADES:

• Bear Stearns upgraded Diana Shipping Inc (NYSE: DSX) to Outperform from Peer Perform.
  
• Morgan Stanley upgraded Telephone and Data Systems Inc (NYSE: TDS) to Equal Weight from Underweight.
  
• Targa Resources Partners (NASDAQ: NGLS) was upgraded to Outperform from Market Perform at Wachovia.
  
• Steelcase Inc (NYSE: SCS) was upgraded to Neutral from Sell at Goldman.