Monoline insurers are so named because they originally covered just one line of business â€“ municipal bonds. Today, however, because they do not insure lives, or automobiles or medical expenses, the name has stuck despite their additional reach into insuring financial assets of all varieties. In a real sense, the monolines have taken on their shoulders a supersized portion of the guaranteed solvency of modern asset structures. In combination with overly generous triple-A ratings on not only these assets but the monoline companies themselves, they have fostered a bubble of immeasurable but clearly significant proportions. That the monolines could shoulder this modern-day burden like a classical Greek Atlas was dubious from the start. How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the worldâ€™s sixth-largest economy? How could an investor in Californiaâ€™s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nationâ€™s largest state with its obvious ongoing taxing authority? Apply the same logic to the gargantuan size of the asset-backed market it has insured in recent years â€“ subprimes and CDOs in the trillions of dollars â€“ and you must come to the same logical conclusion: this is absurd. It is as if Barney Fife, televisionâ€™s Sheriff of Mayberry in The Andy Griffith Show, promised to bring law and order to the entire country.
Great essay. From the Financial Times