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It is becoming increasingly difficult to be surprised by some of the illogical fallout from the credit crisis. But when wrapped triple-A bonds (with a double-A underlying) start to trade outside unwrapped double-A bonds for the same name, it really does seem that all reason has departed. This is what happened in November, when the Ambac-wrapped triple-A bonds issued by BT’s Telereal vehicle were trading wider than its unwrapped double-A bonds. In other words, the market saw the fact that the bonds were wrapped by a triple-A rated insurer as increasing, rather than reducing, the risk involved. Whether or not this is as ludicrous as it sounds depends on just how precarious a position the monolines are really in. This industry is certainly used to questions being raised about its viability; activist fund managers such as Pershing Square Capital’s William Ackman have been persistent bears on monoline insurers for years. As this magazine has pointed out before (see The End for Monolines Euromoney March 2007), these firms have increasingly moved away from their traditional municipal markets to higher-yielding structured and project finance, and that structured exposure has recently focused on CDOs.