Those monoline insurers, like MBIA, insure about 1 Trillion worth of muni bonds. If they get downgraded, all the bonds that they insure get downgraded. Many bond investors, like pension plans, are required to buy and hold only highly rated paper. When -- not if -- these muni bonds get downgraded many will be liquidated. When a bond gets downgraded, people demand a higher interest rate, which requires the holders to sell for less than face value.
The reason the insurers are headed for downgrade is that they ventured into the SIV and CDO insurance business. Recently people have begun to realize that the insurers cannot begin to cover the losses that may occur on those items.
Is this an avalanche? Will it take down the whole financial system? With these bonds worth less, many stock holders may be forced to sell in order to compensate for their loss in bonds. Snowball ...
The reason the insurers are headed for downgrade is that they ventured into the SIV and CDO insurance business. Recently people have begun to realize that the insurers cannot begin to cover the losses that may occur on those items.
Is this an avalanche? Will it take down the whole financial system? With these bonds worth less, many stock holders may be forced to sell in order to compensate for their loss in bonds. Snowball ...