How big might the hole be?

Following on from my musings earlier in the week that it was the (perhaps false) hope of a monoline bailout that caused the market recovery, possibly together with a bounce back after the negative price impact of Soc Gen's liquidation of its rogue trader position, let us turn to the result of a downgrade of Ambac and MBIA. Bloomberg has an item about a recent research piece:

Banks may need to raise as much as $143 billion to meet regulators' requirements should rating firms downgrade bond insurers, Barclays Capital analysts said.

Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Financial Group Inc. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today.

If that is even within spitting distance of the truth, it explains why the markets reacted so positively to the news of a possible bail-out, and why if permabears like Pershing Square's Bill Ackman are correct the bounce in MBIA and Ambac is both purely temporary and very troubling for the banks.

The problem with the proposed rescue is knowing how big it might need to be - Dinallo thinks $20B, but Egan Jones' estimates are an order of magnitude higher - and who stands most to gain and hence who should put the most in. Without reliable mark to markets on the wraps the monolines have written (which remember are mostly insurance and hence not MTM), how can Dinallo determine who contributes what? Without FED involvement it is hard to see how this can work, and even if they do 'persuade' banks to contribute - as they were signally unable to do with the MLEC - figuring out the flows will be a difficult business.