Those monoline insurers, like MBIA, insure about 1 Trillion worth of muni bonds. If they get downgraded, all the bonds that they insure get downgraded. Many bond investors, like pension plans, are required to buy and hold only highly rated paper. When -- not if -- these muni bonds get downgraded many will be liquidated. When a bond gets downgraded, people demand a higher interest rate, which requires the holders to sell for less than face value. The reason the insurers are headed for downgrade is that they ventured into the SIV and CDO insurance business. Recently people have begun to realize that the insurers cannot begin to cover the losses that may occur on those items. Is this an avalanche? Will it take down the whole financial system? With these bonds worth less, many stock holders may be forced to sell in order to compensate for their loss in bonds. Snowball ...
a scary thought... the snowball can really pick up steam fast. How many downgrades will follow, what can the regulators do to prevent it from happening ... we are in more trouble than most realize. time will tell
I don't know but that's why the market flopped after the Fed announcement and that's why the financial markets are going to continue crapping on themselves even if they rally here and there. But don't worry, our fearless leaders are vigorously ignoring the issue which of course will make it go away.
The rich and powerfull will always get better advice than the poor.They're smarter or are backed by those who are.They protect wealth and so in turn have their own wealth protected.