Feb.14, 2008
In addition to the assetbacked commercial paper crisis there is also a problem with the insurance companies who have traditionally insured municipal bond issuers. These companies are called monoline insurers because they specialize in insuring bonds issued by municipal authorities and other assets normally auctioned off to banks and other usually wealthy investors.
The insuring companies who up until recently had AAA credit ratings have suffered a near catastrophic fall in their ratings to in the case of one company junk bond status because of their exposure to the sub prime market seizure and general financial mess associated with it. In normal times their backing would have insured that debt packages connected to municipal bonds would receive a high credit worthy rating. But since the near paralysis of the credit markets this is no longer the case. A number of brokerage house, dealers and banks are affected by exposure to these debt instruments including some of the largest and most prestigious financial houses in New York.The monoline insurers normally ensure more than 2 trillion dollars of debt. the portion of this debt that is at risk is not yet clear, perhaps as much as 10-15 % of it. Because of this the financial markets remain very nervous.
Some of the financial houses have already announced their potential loss liability but others have yet to make completely clear how much they are exposed. Warren Buffet has offered to bail out the insurers, apparently but only for a price and only for the better quality debt. His offer is under consideration both by the markets and the New York state regulator. If it is accepted it should improve the situation. But in the meantime considerable uncertainty about the extent of potential losses continues to cloud the picture and weigh heavily upon regulators, as it should.
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