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That Bond Insurer Bailout

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Today was the day that was supposed to happen yesterday. The market plunged in the morning and then “staged a turnaround” or “bounced back” or whatever metaphor you want to use for the increasing share prices. The Dow Jones Industrial Average swung more than 600 points.
What’s going on? We’re allergic to explanations of market movements but we’ll venture a bit of speculation. There were rumors of a quant hedge fund liquidating it’s positions that helped drive sellers afraid of a repeat of the turmoil from last August. These might have helped fuel the downward draft. On the upside,
word spread that Wall Street banks might bailout the bond insurers. Since the weakness of the bond insurers has been depressing banking stocks and the failure of a major bond insurer could result in more losses for banks, it’s not surprising that Wall Street would be interested in rescuing them. Shades of Long Term Capital Management.
The movement for the insurers was huge. Shares of insurer Ambac jumped 72%. MBIA was up 33%. The bank stocks surged as well, with Citi climbing something like 9% and JP Morgan Chase surging 12%.
Ben White and Aline van Duyn broke the story wide open in the Financial Times, making what had been a whispered rumor into something much more concrete. According to White and van Duyn, the details of the bailout are still being worked out but “contributions to the bail-out fund would not necessarily be based on how much exposure each individual bank has to the insurers, known as monolines.”
Banks pressed to bail out bond insurers [Financial Times]
LTCM 2.0: Should Wall Street Bail Out the Bond Insurers? [DealJournal]