Monoline insurance – goes around, comes around

You can’t make this stuff up.

The New York Insurance Superintendent has asked banks to stump up about $15bn in capital, with a $5bn down-payment, to bail out the monoline insurance which face ratings downgrades. The threat to the banks being that if they don’t pay up, then the resultant rating downgrades will force the banks to have to write down the inventories.

So banks hand over funds, at a time when their own capital positions are weakened, and their inventories preserve their value. Meantime, the bond issuers continue to pay the Monoline insurers for cover they would otherwise struggle to provide.

It hasn’t been determined whether the contributions from banks should be linked to their exposures to the monolines. So banks with the most to lose may have to pay the most.

But equally ironic – news of a possible bail-out sent share prices for both Ambac (up 70%+) and MBIA (up 30%+) soaring, making any potential investments more expensive.


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