Those who believe wotse is over, there is some bad news. I think we are just seeing the tip of the iceberg. FT Alphaville pointed to this article which says trouble is back in Monoline insurance companies. What is Monoline? See this Wikipedia primer.
The blog post is based on this NY post article which says:
At issue is a type of protection that banks have obtained against defaults that is now preventing them from purging portions of their holdings of arcane mortgage securities known as collateralized debt obligations.
Under the terms of this protection, the banks need approval from the monolines in order to unwind these securities – and obtaining that OK is proving difficult in some cases
For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately – a tall order for companies whose financial future is already murky.
Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.
So, as I said in my CDS report, settlement is a problem with these complex instruments. In times of low volatility all these firms have taken up huge exposures to instruments expecting it to be this way all the time (20-30 years as per Monolines!!) . And now we see this mess and no one knowing how to settle the claims.