Here is a very interesting article from The Independent regarding covered bonds and monolines (a term I have never heard of before)
“Jeremy Warner’s Outlook: Crisis in credit markets widens further
Published: 23 November 2007
It began with US sub-prime mortgage lending, but, like a rock thrown into the middle of the pond, the impact is progress-ively rippling out to affect all areas of the structured credit markets. The latest casualties include the $3trillion “covered bond” market, where conditions have become so dire that European bankers have agreed to shut up shop and suspend trading until next week.
In another worrying sign that the credit crisis is still gaining force rather than subsiding as hoped, questions are now being raised over the future of so-called “monolines”, another previously obscure area of the debt markets which is said to insure some $2.3trillion of structured and US public finance credit. Two mutually owned French banks, Caisse d’Epargne and Banque Populaire, were forced yesterday to provide $1.5bn of rescue finance to one of these bond insurers, CIFG, after credit rating agencies threatened to strip the organisation of its triple-A rating.”
This could become a Major story in this credit crisis
“Monolines, most of them Bermuda-based and therefore outside the orbit of frontline banking regulation, provide bond insurance, so that even when the underlying security defaults, principle and interest is paid when due. The availability of credit insurance of this sort has encouraged banks to write more loans, confident in the knowledge that they can sell on the ones already made on a fully insured basis.
Yet if the insurer cannot pay, then the credit risk comes bouncing back. And if the monolines are all about to be downgraded then, a bit like Northern Rock, they will struggle to find the counterparties willing to sign up to the other side of the contract. Funding for the insurance provided will dry up”
beginning of last paragraph in article;
“It’s also worth remembering that a bank doesn’t have to write down an insured loan even when the loan is turning sour. Yet if the insurer goes bust, then all bets are off.”
Man….this thing just keeps going and going and going!
