Monoline
Monoline: A company specializing in only one aspect of the finance industry—commonly used to refer to the companies that insure municipal bonds.
MONOLINE IN THE REAL WORLD: In the "classic" Billy Crystal film City Slickers, the character of Curly, played by the late, great Jack Palance, holds up a single index finger to Crystal's character Mitch (who has gone, amid a mid-life crisis, to "find himself" by working at a dude ranch driving cattle) and says, "One thing. Just one thing. You stick to that and everything else don't mean [bleep]." It's an interesting commentary on commitment and success. There are some really successful one-trick ponies in the world. But what happens if a business finds that one thing, does it really well and then the market goes sour? Well, just ask MBIA, AMBAC or FGIC and, especially ACA what happens. Trouble. And these monolines have found themselves some serious trouble amid the subprime mess.
Monoline: A company specializing in only one aspect of the finance industry—commonly used to refer to the companies that insure municipal bonds.
MONOLINE IN THE REAL WORLD: In the "classic" Billy Crystal film City Slickers, the character of Curly, played by the late, great Jack Palance, holds up a single index finger to Crystal's character Mitch (who has gone, amid a mid-life crisis, to "find himself" by working at a dude ranch driving cattle) and says, "One thing. Just one thing. You stick to that and everything else don't mean [bleep]." It's an interesting commentary on commitment and success. There are some really successful one-trick ponies in the world. But what happens if a business finds that one thing, does it really well and then the market goes sour? Well, just ask MBIA, AMBAC or FGIC and, especially ACA what happens. Trouble. And these monolines have found themselves some serious trouble amid the subprime mess.
Monoline insurers are those, like the above-mentioned companies, that historically (since 1989, anyway) specialized solely in guaranteeing municipal bonds. So that's monoline, as in "one line of insurance. (Monoline insurance is also known as financial guaranty insurance or bond insurance.) They don't do life insurance or health insurance or property insurance. They do their one thing. And like Curly in City Slickers, they'd been doing their one thing really well. That's because municipal bonds don't suffer defaults very often; so it's a safe, if dull business.
But more recently, in blatant violation of "Curly's Rule," even if not in violation of any real law, they (along with everyone else in the financial industry) expanded into mortgage backed securities, CDOs and the other usual suspects of the recent credit crisis. For a time the monolines were happy to take a nice fee to do this and all was well...until the crescendo of mortgage defaults arrived. All of a sudden the monolines found themselves the guarantors of the paper made up of bad mortgages. Oops. That has led to the crisis among the monolines you have been reading about recently. That crisis has included the delisting and credit downgrade of ACA and the credit downgrade of AMBAC. It has led also to Fitch Ratings placing most of the other monolines under credit review. And the longer the foreclosures go on, the more in danger the remaining highly-rated monolines are, like ACA, of seeing their triple-A or AAA ratings reduced, leaving the paper they insure pretty much junk. And that could be the ultimate financial disaster, as there are estimates that the monolines are on the hook for some $2 trillion-plus in municipal bonds and structured securitizations.
This is important because many municipalities rely on monoline insurance to achieve a AAA rating on their bonds that they wouldn't otherwise receive. Any downgrade of the monolines and resultant junk-ification of municipal debt would seep into the municipal bonds themselves and cause bond prices to plummet, not because the bonds were any riskier, but because the bond lost the backing that enabled it to be rated at AAA. (The municipal bond rating falls or rises to the rating of the monoline—a practice called "credit wrapping.") And that's the last thing local governments need in a difficult economic environment. Extreme pessimists see a potential stock market crash in all this. And then there are monoline defenders who say the whole crisis is overblown and that the monolines don't need any help. Of course, deciding who's right is not part of the PMBA mission. In any event, like with the SIVs before, any number of players in the financial industry has floated a plan to bail out one monoline or another, but so far the plans have been headfakes or just unworkable, although Warren Buffet may be getting into the monoline business, and AMBAC proposed to sell $1 billion of its own common to bolster its balance sheets.
Monoline insurance companies as they exist today grew out of a series of crises in the economy and the bond industry that included New York City's near default in the 1970s and other bond defaults in the 1980s. At the time, bond insurance was provided by monolines and multilines (insurance companies that will write coverage on more than one product line). The fear that the bond defaults would infect the regular insurance industry and lead to its collapse led the National Association of Insurance Commissioners to adopt the Financial Guaranty Model Act, which sought to have bond insurance separated from the rest of the industry. Using the Model Act, New York State amended its insurance law in 1989 to include Article 69, which required that bond and financial guaranty insurance be provided only by the monolines. Because the law applies to all insurers licensed in New York and makes the locus of the risk irrelevant, by default the law also pretty much obviated any chance that a multiline insurer would provide bond insurance because if it did so, it would be excluded from the New York market.
So what would Curly say about the monolines predicament? Pocket MBA figures he would still hold up one finger. It just might be a different finger.
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