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Insurers include MBIA, Ambac, Security
Capital Assurance, Financial Guarantee Insurance: |
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The monoline bond insurance
industry was created in 1971 by Ambac. The function of the
monoline insurers is to insure municipalities' bond issues.
This insurance allows easier and safe financing for needed
municipal activities such as construction and maintenance of
infrastructure and expansion of public services.
Underwriting of municipal financing is essential to lower
the borrowing costs laid upon municipalities for their
issuance of bonds and securities. This insurance for the
purchasers in case of default on the debt allows
municipalities to incur lower borrowing costs, thus lowered
overall project development costs for taxpayers. |
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Over recent decades the
monoline insurers have grown through expansion into
structured products. Those products include asset backed
bonds and collateralised debt obligations -- CDOs.
In recent years, monoline insurers entered the world
of structured finance and complex credit derivatives that
are now causing troubles for them. |
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Ratings agencies include Moody's, S&P,
& Fitch: |
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Ratings agencies monitor
insurers for adequate financial strength. They assure
investors that the insurance companies are following proper
fiduciary protocols. |
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Over recent years, the
ratings agencies have broadened their monoline business to
include the additional products being handled by the
insurers. Those include structured products such as CDOs,
SIVs, and other complexly intertwined securitized
instruments. The underlying components of these new products
were residential mortgages and related equity guarantees. |
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Because the securitized
instruments were insured by the insurers and because the
insurers were known to be monitored by the ratings agencies,
buyers around the world felt safe in purchasing securitized
products. They had inadequate concern for potential -- and
actually -- increased risk. Moreover, after four decades of
housing price inflation, there was inadequate concern for
development of a bubble. |
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In recent years home
mortgages and equity loans of various time-based rate
structures have been made available to borrowers who were
not credit-worthy nor up to rational and strictly enforced
standards. During 2007, those subprime borrowers have
started a default deluge. That defaulting has brought into
default other marginal borrowers. The confluence of all
defaulting brought fear to potential buyers and those
already holding CDOs and other structured securitized
obligations. In mid-2007, the markets for these instruments
became illiquid. Therefore valuations could not be
identified. Thus, credit markets clutched and froze. |
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Only as ratings
agencies analyze and confirm rating assessments of insurers,
as insurers prove that they are capable of meeting default
commitments, then -- following a rebuilding of confidence in
ratings and ratings agencies and insurers -- credit
clutching will decrease, capital will flow, credit will
become available, and credit markets will return to liquid,
profit-oriented mechanisms. The credit clutch freeze up will
thaw and risk will be attractive. |
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