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Plans to split up bondinsurers and derivatives
based on mortgages and buyout loans.
Like a 1930s bank run
There are now plans to split up the companies
that insure bonds and derivatives based on mortgages and buyout loans.
breakup plans also would lead to tens of billions more in write-downs
Jim Jubak 22/2 2008
The crisis of confidence that has gripped the debt markets is like an old-fashioned, Depression-era run on the banks
Whom can you trust to pay what they owe?
Ratings. Bonds and credit derivatives, the things with names like collateralized debt obligations and mortgage-backed securities, were built on top of mortgages, car loans, credit card receivables and so on. They came with ratings from companies such as Standard & Poor's, Moody's (MCO, news, msgs) and Fitch
Investors who weren't certain they wanted to trust a rating (or who wanted extra security) and borrowers who wanted to get a higher rating (and thus pay less for the money they were borrowing), could pay an insurance company like Ambac or MBIA
The derivative market.
The failed auction and the shutdown of a $300 billion hunk of the municipal-debt market finally spurred government into action, although not the government in Washington. New York Gov. Eliot Spitzer and Insurance Superintendent Eric Dinallo, who have just a bit of clout because the country's biggest financial markets are in their state, gave the insurance companies an ultimatum
One piece, the "good" company, would keep the portfolio of low-risk insurance for the municipal market. The other piece, the "bad" company, would get the high-risk paper.
The banks hate this idea. It would leave all the risky paper in their portfolios insured by the bad company.
Fortunately for the folks who run for-profit banks, there's always the U.S. Federal Reserve. That bank opened a new window Dec. 12 called the Term Auction Facility that accepts "damaged" assets as collateral for new loans.
So far the banks have borrowed $50 billion from the Fed this way.