Whit Paper Proposal - Monoline Insurers

Monoline insurers (like MBIA and Ambac) are in trouble. When the credit crisis hit last summer, many of the contracts they insure (bonds and credit derivatives) defaulted, essiantially blowing up in their face and leaving them buried under mountains of debt. Now they are facing ratings downgrades (Ambac has already been downgraded and is looking at further downgrades). When a monoline is downgraded, its ability to make good on its insurance contracts is seen to have decreased. In turn, the securities they insure are all downgraded and lose value. This could amount to hundreds of billions in loses.

The question is how (or if) to rescue the monoline insurers. Some hardliners think that people need to pay for their greed and that any rescue plan would send the message that it’s okay for institutional investors to make stupid bets on the grand scale. However, most agree that doing nothing would be a catastrophe. So, what to do? The big banks could come in with truckloads of money. After all, they are the ones who would be hit the worst. But then, getting them all to agree on a rescue plan in their fragile state would be difficult to say the least. Washington could organize a capital injection package. The SEC could temporarily change the rules of the game. The rating agencies could agree to no further monoline downgrades until the credit crisis has been smoothed over. Warren Buffett could swoop in like an angel (he already has, to a small extent). Whatever the case, quick action is needed to prevent further economic turmoil.