How did I miss this PM news item? It appears not to have gotten the attention it deserves.
The list of aspirants to gorge themselves at the government feeding trough gets larger with every passing day. The latest addition is the bond insurers.
As far as I am concerned, they are hugely undeserving. The world survived what was supposed to be the End of Finance As We Know It, namely the loss of the monoline AAAs. Now that we are past that point, pray tell what is the systemic need for a monoline guarantee? Yes, I am sure around the margin it would reduce some casualties, but the powers that be need to start doing triage, and this crowd does not pass muster.
The good news is the initial reaction from Treasury appeared to be cool, and since the monolines are a small industry regulated by the states, it is doubtful that they have spent much money in DC cultivating powerful friends over the years. The news story is so far based on an industry wish list and a favorable research note from one analyst.
But the prospect of a monoline handout contributed to the peppy end-of-day stock market rally. And if the monolines do get a backstop, this says there is no discipline in the process in Washington, none.
The logic of these bailouts and emergency measures is simply untenable. Bernanke is trying desperately to stop deleveraging. That is neither a wise nor viable objective. There is too much debt relative to the underlying economies. More has to be written off, and the trick is how to do that without producing a crisis in confidence (oh wait, we are past that point, aren’t we?). But what Bernanke and his fellow central bankers are trying to do is move bad assets over to the government balance sheet AND provide equity to banks so they go make more loans. The problem is that this merely increases aggregate indebtedness, when a signficant rataionalization needs to take place.
Hopefully, Treasury and the Fed are out of panic mode and will be a little less quick to throw money at every problem that arises. But if they continue with their recent pattern, the US is on its way to debt default, either via substantial inflation or an explicit failure to pay.
Ambac Financial Group Inc. and other bond insurers are working on a plan to send to the U.S. Treasury that would enable them to sell troubled assets to the government, Chief Executive Officer Michael Callen said.
The companies also may present a proposal next week that would allow the insurers to guarantee some assets with government backing, Callen said in an interview today.
“We’re working hard to put together a proposal and it’s got to be an industry proposal,” Callen said. “We don’t have a lot of time.”
The Treasury’s $700 billion program to buy troubled assets may allow the two guarantors to dispose of bonds backing collateralized debt obligations that they guaranteed, Royal Bank of Scotland Plc analyst Michael Cox said in a research report. Banks also may be more willing to cancel credit-default swap contracts they bought from bond insurers if the banks can sell the underlying CDOs to the government, Cox wrote.
Callen said he isn’t asking Treasury to take a stake in Ambac.
“We’re not going to be asking the government to give us a big gift,” Callen said.
The Treasury yesterday said it isn’t considering buying equity holdings in bond insurers. “That’s not an idea we’re focused on or pursuing.” Treasury spokeswoman Jennifer Zuccarelli said in an e-mail to Bloomberg News.