'Monoline' Insurers' Default May be Imminent
Dec. 23, 2007 (EIRNS)"Monoline" insurers, which comprise a pyramid scheme insuring radioactive collateralized debt obligations (CDOs) and mortgaged-backed securities (MBS), as well as a large proportion of the nation's municipal bonds, are cratering; their collapse would accelerate the ongoing collapse of the world financial system. This may generate a shock effect as early as the first two weeks of January.
The monolines operate differently than traditional insurance companies; more accurately, they would be called credit derivatives marketers. As an example, let us say New York City issues $1 billion in bonds. The monoline insurer will charge the New York City a significant fee, and then guarantees that should New York City default on this $1 billion, the monoline insurer will pay to the bondholders, in a "timely fashion," the principal and interest that New York City owed on the bond. In 1971, the monoline insurers started insuring state and city bonds on a limited scale. Fascist Felix Rohatyn put the monolines on the map in 1975: Rohatyn and Wall Street forced New York City (and its bonds) into bankruptcy, so that Rohatyn could then force New York's population to accept the murderous conditionalities of the Municipal Assistance Corporation (Big MAC). The monolines went to city governments and bondholders and said: "You see the bankruptcy of New York City's bonds; you need our insurance."
In 1993-95, the monolines began insuring leveraged and increasingly risky MBS and CDOs. That financial paper which underlay the MBS and CDOs may be worthless garbage; but once the monoline insurers insured that paper, its paper would be rewarded with an AA or AAA rating by the rating services. But the monolines don't have the resources to really pay out coverage on the massive amount of paper they've purportedly insured.
By the middle of 2007, when the monoline insurers were insuring $3.5 trillion, including a majority of the $2.3 trillion municipal bond market and more than $1 trillion in CDOs and MBS, this pyramid scheme began to come unglued:
**ACA is one of the big four monoline insurers. The Dec. 20 issue of the Hat Trick Letter reported, "ACA is widely called the 'garbage can' for Wall Street, where tremendous losses are concealed from stock investors, corporate bond investors, debt rating agencies, and bank regulators." (emphasis in original) The newsletter continued, that were ACA to insure a bond for Goldman Sachs or Merrill Lynch, then those companies might be able to take that failing bond off their balance sheets, or at least hide its real losses. It asserted that, were ACA to default today, this would "force Merrill Lynch to delcare a $3 billion write-down of its CDO bonds." This is true many times over for many Wall Street firms, and ACA and other monoline insurers.
Default for ACA appears imminent, some indicate, perhaps, in the first two weeks of January. ACA has only $1.1 billion in cash on hand, and has lost $1 billion during the last quarter. On Dec. 19, Standard & Poor's downgraded ACA 12 notches to CCC. Without an AAA rating, ACA is worthless.
**On Dec. 21, Fitch rating service put MBIA, the biggest monoline, on review for potential credit downgrade, unless, among other things, it raises $1 billion in capital during the next 4-6 weeks. MBIA revealed that it has insured $30.6 billion worth of bonds of CDOs and MBS, including more than $8 billion of CDOs based upon other CDOs, one of the most worthless types of crap. On Dec. 21, Fitch also placed Ambac, another of the monoline big four, on review for downgrade.
The imminent monoline ruptures would reveal and produce several hundreds of billions of dollars of additional losses among bankrupt Wall Street and other nations' banks, something they cannot sustain. It would endanger the $2.3 trillion municipal bond market. The monolines' "insurance" outstanding of $3.5 trillion is actually part of the $45 trillion world "credit derivatives" market, and would wipe out that, and the entire world's derivatives market.