while I am not sure I understand all this, John Hempton over at brontecapital has an intelligent discussion about the whole thing. There are 2-3 posts, here is the biggest one:

http://brontecapital.blogspot.com/2008/07/gigs-and-ambac.html

This is far from my field of expertise but are you saying that the monolines issued GIC’s and then capitalized them with subprime and other securities for which they had issued ratings?

CREDIT BUBBLE BULLETIN
Good inflation?
http://www.atimes.com/atimes/Global_Economy/JF24Dj04.html

The bust in Wall Street finance is driving a major shift in economy-wide spending patterns, putting downward pressure on wages, incomes and profits in some sectors, while other sectors enjoy huge inflationary boosts. The breakdown in Wall Street “alchemy” has ensured that this round of Fed-orchestrated reflation bypasses home prices as it hastens problematic inflation elsewhere.

Students of the sordid history of massive inflations are familiar with the inevitable pleas for just a little bit more inflation and a little more and a then lot more … McCulley wants us to believe the Fed is doing the right thing by providing us some “good inflation.” This really upsets me. I’ve repeated over a number of years a lesson learned repeatedly throughout history: Inflationism is a road to ruin. This road has become all too visible.