Tidbit: Monoline
Many will fret the new term in the news right now: Monolines.
Investors are concerned that the turmoil that has hit the subprime sector may be spreading to bond insurers.
These so-called "monolines" provide insurance against defaults on bonds and sophisticated financial instruments such as collateralised debt obligations.
The worries follow last Friday’s downgrading of US-based monoline pioneer Ambac by ratings agency Fitch, raising concerns about its ability to raise new business.
Ambac’s ratings cut triggered a series of downgrades for the leading bonds it guarantees, including those issued by London Underground and Arsenal football club. Yesterday, the bond insurer posted a quarterly loss of $3.3 billion (£1.7bn) after recording massive credit derivative write-downs and setting aside more money for credit losses.
Analysts now point to a potential unravelling of the £1 trillion-plus monoline insurance sector.
Some might wonder whether the case for a turmoil is really big enough for us to worry about. I guess what Bill Gross says will certainly give you an idea on the extent of how absurd this could get:
"How could Ambac (ABK), through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority?"
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