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Friday, November 09, 2007


buying time for the monolines

ft notes that fitch is providing all the forbearance it can to the monolines, for fear of precipitating a massive credit market collapse with a single downgrade.

The problem that dogs the ratings agencies is that if they downgrade the monolines, this could spark a much wider chain reaction. For the business model of the monolines does not work unless they have a AAA rating (or equivalent.) Or as a non-executive director of one monoline says: “The credit rating agencies are like our regulators — they have the power of life and death over us.”

in the end, one suspects, this is deferral and not salvation. the downgrades and bankruptcies are probably coming, and when they do the entire municipal bond market is likely to shake violently. the monolines' two main lines of business were insuring municipal bond offerings and insuring mortgage-backed securities and cdo's. what looks like a ten-story wall of cdo defaults bearing down on the monolines has called their ability to weather the storm into serious question. as a follow-on consequence, already the muni bond market is seeing slack demand.

Officials shelved the two refinancings totaling $1.5 billion as a weekly index of 20-year tax-exempt yields rose the most in three months. Concern that credit quality may deteriorate for bond insurers, which provide backing for almost half of the $2.5 trillion of municipal debt outstanding, weakened bids for tax-exempt debt.

and all this comes at the worst possible time (of course) for states and municipalities, which are seeing lucrative streams of housing-related tax revenues vanish and sales tax receipts decline with a softening economy.

munis underlie huge swathes of the money markets, as well as the portfolios of insurance companies, pension and endowment funds and commercial banks.

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