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An Attempt At A New Monoline Thread


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Anthony Hilton in the London Evening Standard is spot-on about the monoline train-wreck waiting down the line:

Insurance disaster could cost billions

Anthony Hilton

21.01.08

The insurance industry made a big fuss a few months ago about " fronting up" - the trick whereby parents reduce the cost of motor insurance for a 17-year-old son.

Instead of insuring the youth as they should as the main driver of his vehicle, the parents pretend it is their car and take out the policy in their own name with the high-risk youth listed as an additional driver.

The insurance company thinks its primary risk is to the mature stable drivers who have not had an accident for years, and charges accordingly. The reality is that its risk is the 17-year-old who drives the car most of the time.

Inevitably, that leads to more accidents than the insurer had expected and priced for. As a result, it loses a pile of money, which is why the industry now says this is fraud because the nature of the risk is misrepresented to them.

In economic terms, what these parents have done is sell their credit rating to their son, so that he in effect reaps the benefit of their no claim bonus.

Interestingly, though motor insurers now no longer allow it, this is precisely the business of themonoline insurers - the companies that threaten to be the most dangerous casualties yet of the credit crunch. These predominantly US insurance companies have triple A credit ratings, and their business is guaranteeing the creditworthiness of lesser-quality bonds.

In effect, they lend their credit rating to the weaker business in return for a fee. Once a poor-quality credit - say a triple B - buys insurance against default from the monoline, its credit becomes as good as the insurance company that has agreed to cover any default. It appears to become triple A.

But the reality is that the risk has not gone away. It has simply been obscured, just as it is with the parent fronting for the son. This sleight of hand does nothing to reduce the rate of accidents.

Greed blinded the banking community to this, and the accidents have begun to happen. The disaster threatening to engulf the financial system is that the cost of the defaults on these insured bonds could overwhelm the insurers, exhaust their capital and force them to default. We are not there yet - at least among the big boys - but it is a high enough probability for rating agencies to warn they may have to cut the insurers' triple A rating in anticipation of such problems, and unless they get a lot of additional capital from somewhere very quickly.

This is serious because if the insurers' rating is cut, it will pull the rug out from under every bond that has passed through their hands. It will cut the rating of all the tens of thousands of bonds they have insured - those of respectable local authorities and municipalities will be downgraded along with the toxic credit derivatives. Low-rated bonds have a lower face value and require a higher rate of interest. A rate cut on such a huge scale would trigger hundreds of billions of losses across the entire financial system. No pension, insurance policy or money fund would escape unscathed.

More here:

http://www.thisislondon.co.uk/standard/art...ions/article.do

Edited for link

Edited by Captain Coma
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Guest mSparks

and it will be removed, this site has absolutely no interest in letting us talk about the real reasons behind todays S.M. which ultimately precedes the HPC and UK bankruptcy from the Labour party selling our futures to these assholes.

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I'm interested to know more about bond insurers. I'm aware that recent media coverage of "Monoline" insurers AMBAC and MBIA - but do they underwrite UK mortgage debt? Are they exclusively operating in the American markets? Are UK Mortgage backed securities underwritten in a similar way? If so, by which companies?

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Anthony Hilton in the London Evening Standard is spot-on about the monoline train-wreck waiting down the line:

In economic terms, what these parents have done is sell their credit rating to their son, so that he in effect reaps the benefit of their no claim bonus.

Of course, should the son have an accident then his parents' no-claims (credit rating) will be reduced...

Interestingly, though motor insurers now no longer allow it, this is precisely the business of themonoline insurers

...oops

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I'm interested to know more about bond insurers. I'm aware that recent media coverage of "Monoline" insurers AMBAC and MBIA - but do they underwrite UK mortgage debt? Are they exclusively operating in the American markets? Are UK Mortgage backed securities underwritten in a similar way? If so, by which companies?

I read somewhere today (can't remember where) that it's mostly in the United States, although presumably not every UK bond gets insured in the US, and also presumably they all need insuring, so ... there must be some (small) monoline market in the UK, too, logic would dictate,

Would it be worth us investigating who those firms might be? It's certainly been kept quiet so far. Hilton talks in his article about the disaster being similar to the Lloyds of London debacle, but I don't think they insured bonds, though don't quote me on that! ;)

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I read somewhere today (can't remember where) that it's mostly in the United States, although presumably not every UK bond gets insured in the US, and also presumably they all need insuring, so ... there must be some (small) monoline market in the UK, too, logic would dictate,

I posted this on a previous dangling-end of a thread... It explained a bit to me - but left me with questions about the UK market more than it answered my questions about "Monoline" (per se.)

http://en.wikipedia.org/wiki/Monoline_insurance

Edited by A.steve
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This is the real issue

http://business.timesonline.co.uk/tol/busi...icle3228378.ece

There are concerns that the multibillion-dollar liabilities that banks hedged with the bond insurers could come back on to the banks' balance sheets if the insurers fail

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This is the real issue

http://business.timesonline.co.uk/tol/busi...icle3228378.ece

There are concerns that the multibillion-dollar liabilities that banks hedged with the bond insurers could come back on to the banks' balance sheets if the insurers fail

If teh risk comes back to the bank libor will rocket. Interest rates will be double digit for home owners and overdraft interest will be nearer 20%. 100% hope not but true

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If the risk comes back to the bank libor will rocket. Interest rates will be double digit for home owners and overdraft interest will be nearer 20%. 100% hope not but true

I don't know, but I gotta say I think you're right. The words "straw" and "camel's back" come to mind ...

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Monolines

By the end of the week, we should know whether the monoline downgrades are a major turning point. (I think this is a mega event).

Risk is risk. It should not be atrificially disguised.

The Crock

Isn't it "unfortunate" that the day Goldman Sachs comes up with a top wheeze for NR and Brown, the whole plan revolves around insuring a turd up to a AAA.

This could well sink the scheme and end up nationalization in a couple of weeks time.

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Guest vicmac64

I agree - and I think when we look back at this we will say that this was the root cause of HPI, banks could get rid of risk (seemingly), of course everyone knew it was a road to nowhere but bonuses were to be had and so we had the greatest bubble develope in the history of the world (the crash will be just as big) What goes up comes down.

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That car insurance scam was around years ago. In the event of the son having an accident, all it needed was for the assessor to knock on a couple of neighbours' doors and ask a couple of carefully chosen questions.

That may have been so but the insurance was being taken out not for need but purely as a statutory requirement. The logic being that no claim would be made from any insurance anyway because the car itself was cheap and could be replaced. The other 3rd party risks were accepted. It's a solution that was never going to give that mischievous 'peace-of-mind' that insurers love to sell but it's an understandable and reasonable logic for a financially stretched family faced with a child that needs transport and trying to avoid exorbitant charges. And more reasonable than buying a car with the intent of leaving it unregistered and disposing of it after an accident - but surveillance has put an end to that one!

Edited by Knut
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Here's a fascinating, and very long thread from tickerforum about monolines....

You might not want to read it if you want to sleep soundly tonight.

http://www.tickerforum.org/cgi-ticker/akcs-www?post=24778

Thanks, Drexler. I am up to page 8 of that thread (of 18) and my eyes have stopped blinking. This stuff makes CGNAO look like a drunken optimist!

I believe it and that's why I wanted a thread on monolines. You know, if you want to understand why your mortgage rate just went up to 22% all of a sudden.

Apparently the FDIC (Federal Deposit Insurance Commission) is hiring like mad to deal with the approximately 300 US banks they estimate will go bust this year once the monolines go t*ts up (and no, the FED can't backstop them because it would take more $ than the entire US GDP to do so).

As somebody on the thread said, "Serfdom here we come."

And it's coming in the next few months. Bernanke just sacrificed his first pawn today, and he's up against the ghost of Bobby Fischer!

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Thanks, Drexler. I am up to page 8 of that thread (of 18) and my eyes have stopped blinking. This stuff makes CGNAO look like a drunken optimist!

I believe it and that's why I wanted a thread on monolines. You know, if you want to understand why your mortgage rate just went up to 22% all of a sudden.

Apparently the FDIC (Federal Deposit Insurance Commission) is hiring like mad to deal with the approximately 300 US banks they estimate will go bust this year once the monolines go t*ts up (and no, the FED can't backstop them because it would take more $ than the entire US GDP to do so).

As I understand it, the problem arises not because the monolines are currently unable to meet their obligations but because their ratings are/risk being downgraded from AAA, meaning the ratings of the insured bonds are similarly downgraded. Armageddon then ensues because the likes of pension funds may not hold lower-rated bonds and must dispose of them -- leading to a firesale of distressed assets and a vicious circle of declining values.

On the face of it, the following two solutions appear to be possible:

1. The US government states that it will stand behind the monolines, with the intention not so much of bailing them out financially but of sustaining the AAA rating of the insured bonds and thus preventing contagion spreading to the rest of the financial system.

2. Legislation allowing funds to hold non-AAA bonds. Not ideal, but then neither is a firesale.

Perhaps the above are non-starters (I'm certainly no expert) but it seems to me that such ideas should be examined and explicitly dismissed before crying 'Doom!'.

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As I understand it, the problem arises not because the monolines are currently unable to meet their obligations but because their ratings are/risk being downgraded from AAA, meaning the ratings of the insured bonds are similarly downgraded. Armageddon then ensues because the likes of pension funds may not hold lower-rated bonds and must dispose of them -- leading to a firesale of distressed assets and a vicious circle of declining values.

On the face of it, the following two solutions appear to be possible:

1. The US government states that it will stand behind the monolines, with the intention not so much of bailing them out financially but of sustaining the AAA rating of the insured bonds and thus preventing contagion spreading to the rest of the financial system.

2. Legislation allowing funds to hold non-AAA bonds. Not ideal, but then neither is a firesale.

Perhaps the above are non-starters (I'm certainly no expert) but it seems to me that such ideas should be examined and explicitly dismissed before crying 'Doom!'.

As I understand the world of the monolines, the problems are:

1) Insurance is designed to work with uncorrelated risk. So, for shipping, all the owners club together to pay a premium into a fund, only a few ships are lost each year, the fund compensates owners, so the risk is spread. However it relies on not all the ships being lost at the same time. If that happened (as equivalently will happen to property insurance when Tokyo or SF have a big earthquake) then the insurance industry fails.

2) The defaults on bonds correlate strongly if there is a recession.

3) The existing bond insurers are holding far more potential losses then their capital, and so are worthless.

4) To make matters worse, they will lose all profitable new business to Warren Buffett's Berkshire Hathaway, which has an intact AAA rating, will be able to charge proper (and attractive) risk premiums.

5) They are simply dead in the water, no hope of recovery.

6) Merrill drove the final nail into the coffin of the monolines on friday when they announced they were making provisions for bonds despite there being monoline insurance in place - so by default all other banks must do the same.

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2. Legislation allowing funds to hold non-AAA bonds. Not ideal, but then neither is a firesale.

Perhaps the above are non-starters (I'm certainly no expert) but it seems to me that such ideas should be examined and explicitly dismissed before crying 'Doom!'.

I suspect that the legislation is there for a reason, not due to a keyboard stutter. The institutions that are bound are pension funds etc - no risk! steady as she goes!

That would be a bad thing. It would just be building another layer of sh1t on top of the existing tower. Doom now is better than DOOM WITH SULPHUROUS KNOBS ON later. Unless the idea of your children suffering is a turn on.

p-o-p

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I suspect that the legislation is there for a reason, not due to a keyboard stutter. The institutions that are bound are pension funds etc - no risk! steady as she goes!

That would be a bad thing. It would just be building another layer of sh1t on top of the existing tower. Doom now is better than DOOM WITH SULPHUROUS KNOBS ON later. Unless the idea of your children suffering is a turn on.

p-o-p

Pension funds passed 'No Risk' several exits back; if it turns out they're holding dodgy debt is it better to sell it into a self-created vortex for c in the $, or to hold it in the hope of a future improvement? Why are regulators (who have allowed this mess to develop) better-placed than pension fund managers to make this decision?

And you're assuming I've contributed to the world's overpopulation problem :P

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As I understand the world of the monolines, the problems are:

1) Insurance is designed to work with uncorrelated risk. So, for shipping, all the owners club together to pay a premium into a fund, only a few ships are lost each year, the fund compensates owners, so the risk is spread. However it relies on not all the ships being lost at the same time. If that happened (as equivalently will happen to property insurance when Tokyo or SF have a big earthquake) then the insurance industry fails.

2) The defaults on bonds correlate strongly if there is a recession.

3) The existing bond insurers are holding far more potential losses then their capital, and so are worthless.

4) To make matters worse, they will lose all profitable new business to Warren Buffett's Berkshire Hathaway, which has an intact AAA rating, will be able to charge proper (and attractive) risk premiums.

5) They are simply dead in the water, no hope of recovery.

6) Merrill drove the final nail into the coffin of the monolines on friday when they announced they were making provisions for bonds despite there being monoline insurance in place - so by default all other banks must do the same.

Is there anything in the above that would prevent their business from being nationalised and their liabilities inflated away, if it came down to it?

I ask because the analysis I've seen so far points to an inevitable deflation as a result of this mess, while I think that an inflationary outcome is also possible (and even likely).

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