Tag Archives: Monoline

Monoline proposal

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Fed by itself or working with AAA counterparty offers to sell supplemental bond insurance to investors. (AFLAC concept)

Maybe charge a point and insure up to a price of maybe 99, or whatever combo works.

Worst case the current insurers are downgraded to AA, so they should still be able to cover losses, so risk is minimal to the new insurer, and fees will likely be profits.

Only investors who care would buy it.

Bonds would remain AAA rated.

The key is the current insurer’s capital is still in first loss position, and the current insurance is probably still money good, or they’d be talking about a downgrade way below AA.

And not all bond holders care about AAA vs AA. Only those who care buy the supplemental insurance.

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The Fed’s next move

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If I were a mainstream economist and on the FOMC (I’m not either, they are both), and world equity markets were firm going into the meeting next week with the monoline issue put to bed, I’d opt for no cut.

That would be expected to rally the $, take down gold and most other commodities, and be taken as a strong move to ‘keep expectations well anchored’ before they had a chance to elevate.

Equities might sell off initially, but be encouraged with the knowledge the Fed was keeping inflation under control, and therefore not get involved into a prolonged, rate hiking fight against inflation down the road.

Also, confidence in the economy would be conveyed, as the no cut decision would be taken as a statement from the Fed that the economy didn’t need further rate cuts.

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