The underpinnings of the irrational addictive cruel greed fantasy that is global capitalism are crumbling, it’s going to be bad-
A NEW and serious crack in the world’s financial system appeared last week when problems surfaced at a small set of obscure, but vitally important institutions – monoline insurers.
They make money by insuring against loans going wrong. If the issuer of a bond goes bust, they guarantee to step in and make interest payments and repay the principal. This security makes borrowing cheaper for companies.
Though the monolines started out in the 1970s to insure bonds issued by American local authorities, they have jumped on the boom in debt markets to grow explosively in recent years. They are estimated to stand behind bonds worth $2.5-$3.3 trillion.
In America, they have helped fund everything from building power stations to schools and hospitals. In Britain, they played a key role in financing the Channel Tunnel, upgrades to the London Underground, Arsenal’s new stadium and in £5.7 billion of private finance initiative projects.
Now the good times have come to a juddering halt. For many, the crisis has been building for six years after the monolines aggressively expanded into insuring collateralised debt obligations (CDOs) – exotic parcels of debt created by investment banks. It looked like a lucrative business as the debt markets boomed. But it has morphed into a monster that now threatens to consume them.
(Reuters) – An attempt by a New York insurance regulator to bailout monoline bond insurers is coming “too late” to avert ratings downgrades, with a broader multi-faceted regulatory response likely required, CreditSights said on Tuesday.