Bond Outlook February 13th
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Bond Outlook February 13th

The signs are that, while talking reassurance, the US authorities are really moving towards damage limitation. What the Buffett intervention really implies is that monoline insurers can go hang.

Bond Outlook [by bridport & cie, February 13th 2008]

Which is the worse news for the financial markets: William Poole’s assurance that the USA will not go into recession or Warren Buffett’s offer to take over municipal bond insurance?

The first is easier to deal with. This is the same member of the Fed who gave us his assurance back in July that the impact of the sub-prime problem was limited to the housing market. Take his pronouncements for what they are worth!

The second is more subtle, but we still judge it to be rather disquieting, for it raises the possibility that what we saw as unimaginable actually come about, viz., that the monoline insurers be allowed to be downgraded. Let us just review the Buffett proposal again. He uses his wealth and influence to create a new municipal bond insurer with the backing of the authorities of New York State. He then proposes to take over the insurance of municipal bonds currently insured by the monolines. He declines any corporate or asset-backed bonds. Just how does that help monolines avoid being downgraded? Good question! Actually, it does not help at all, and rather increases the likelihood of downgrading as they will be left with only Credit-Risk Asset-backed Paper, more commonly known by its acronym!

The US authorities must be holding many secret conferences.

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