Why monoline insurers are so important
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February 5th, 2008 by AdvisorAnalyst
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Feb. 4, 2008 - This article, The Bond Problem, The Economist, does a good job of explaining why the monoline insurers are so important.
Why are bond insurers so important? Because their failure would represent another lurch down in the credit crunch. The original business of the insurers, usually referred to as “monolines”, was to lend their names to bonds issued by municipal authorities (American state and local governments). The municipals were not strong enough by themselves to qualify for an AAA rating; the backing of the monolines reduced their borrowing costs. And since municipal bonds very rarely defaulted, everyone was happy.
Had they stuck to insuring municipals, there would be no problem. But a predictable and safe business always brings pressure to diversify, especially for quoted companies. The monolines moved into insuring collateralised-debt obligations (portfolios of bonds that are sliced and diced into tranches bearing different risk), and that got them caught in the subprime crisis.
Source Article: The Bond Problem, The Economist, February 3, 2008
http://www.economist.com/displayStory.cfm?story_id=10632953
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