Executive Intelligence Review
Subscribe to EIR

PRESS RELEASE


New Inflationary Bailouts,
This Time of Bond Insurers

Jan. 23, 2008 (EIRNS)—The U.S. Federal Reserve was panicked into its drastic midnight cut in short-term rates by the imminent failure of bond insurance companies, and the beginnings of an implosion of financial derivatives, several sources report. Since the morning of Jan. 22, calls and plans are multiplying for government-backed bail-outs of of the bond insurance companies — starting with Ambac Financial Group — on the model of the ruinous $75 billion in bail-outs for the mortgage lender Countrywide Financial. Hyperinflation is the result of this game — see Lyndon LaRouche's warning statement of Jan. 23, which describes the only path out of it for governments.

A New York financial manager reports the Fed governors were moved to panic by the beginnings of a derivative implosion, in the imminent failure of Ambac and the liquidation of ACA, a smaller bond insurer which already failed. This threatens many banks with huge, unpayable claims on financial derivatives. The Fed funds rate was drastically lowered to pump cheaper money into the banking system and hold off these losses.

A Dresdner Kleinwort bank analyst, Kevin Logan, told the London Times the same thing: The Fed was panicked over the weekend by fears that the U.S. bond insurance market, and its financial derivatives overhang, could implode. "The red light that triggered this cut is the issue of the bond insurers," Logan said. "The Fed realised what the consequences were in the event that a bond insurer fails. They hit the emergency switch and cut rates. They spent last week talking about it, calling their contacts. The picture started to look very messy and people realised it could get a lot worse. Then the White House came out with their fiscal stimulus programme which didn’t address anything. The problem is the credit markets."

An analyst from UniCredit bank in Italy says an immediate government bail-out of MBIA and Ambac Financial Group is "highly likely" to avoid a collapse hitting banks. "A kind of bail-out supported by monetary authorities or governments is the only chance for the [bond insurance] industry to survive."

Ambac is now making public announcements that it is will be recapitalized by a merger. New York State insurance regulations are apparently being reviewed and changed overnight to grease the skids for such a bail-out/takeover of Ambac. ACA Capital Holdings Inc.'s state regulator (Maryland Insurance Dept.) is holding off on liquidation proceedings while trying to unwind $60 billion of credit-default swap (derivatives) contracts on which ACA can't pay.