| Archive for Downsizer For an ethical approach to consumption |
| James |
AAA bond insurance crashI got an email from an old friend today. He tends to be a profit of doom, but what he said sparked my interest. He suggested to me that within the week there will be an announcement that Triple-A bond Insurance will crash. This may precipitate a very large, very rapid drop in stock markets and a resulted drying up credit and finances.Between what he has told me and what I’ve since read, here’s my summary: The problems are traced to the sub-prime mortgage market. Cleaver traders have put enormous numbers of mortgages in a big mixing pot, and taken out packages of mortgages based on risk. If you take out only the very safest mortgages, you get what’s called AAA bonds. These are as safe as little red houses. Banks and pension funds like AAA bonds. But what do you do with all the cruddy mortgages that aren’t worth the paper their written on? Well, you blend the low risk mortgages with a proportion of higher risk mortgages and other things, like stocks & shares. Effectively, they’ve tried to hide the bad debt in amongst good debt packages. These were also being traded as AAA bonds. Banks and pension funds became sensitive to the increased risk associated with these riskier AAA bonds, so to guarantee a return they insured the bonds against failure. This is the AAA bond Insurance. While times were good, even these high risk bonds weren’t problematic. Organisations bought AAA bonds and insured them against failure. It never happened & the insurance was never called in. So these AAA bonds became traded widely and were perceived as a decent punt. Everyone was happy. Now that the sub-prime bubble’s burst, the AAA bonds don’t appear so reliable, sub-prime mortgages are popping up in many AAA bonds. But that’s what the insurance was for, so the banks and pension funds have turned to the insurers to bail them out. However, it looks like the insurance houses didn’t recon on the entire AAA bond market going south at the same time. So there just isn’t the resource available to bail out enormous numbers of AAA bonds. The banks are now asking whether the AAA bond insurance is worth the paper its written on. This is a little scarier than it first appears. As far as I can make out, the bonds included stocks. If the risks rating of these bonds drops, then the risk rating of the stocks within them also drops. A higher risk stock has a lower price. Because the bonds are now so widespread, large amounts of stocks are involved. If the insurance fails, there will be two consequences. Firstly, with no bond insurance, bond trading will stop dead. Secondly, stock prices associated with the bonds will fall sharply. |
| Treacodactyl |
I don't think that's new, it's been mentioned for several weeks now. Take a look here: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/01/all_aboard_the_monoline_titani.html
How I understood it was the monoline insurers could have their credit ratings downgraded which will automatically down rate the bonds they underwrite causing another wave of sub-prime losses of a few hundred billion dollars. The only goodish news is it might have already been factored into the market to some degree and there seems to be some activity to try and prevent the worst happening. |
| James |
your right...old news.
Still, news to me, and its got me more woried than I already was. |