What’s going on here? The Dow Jones was down more than 300 points at 1.30pm New York Time and then it closed up more than 300 points in a remarkable 632 points turnaround.
As a result, the Australian market went from staring down the barrel of a 100-point dive to enjoying an opening rally of more than 100 points.
Journalists love to move markets so it was a big moment for the Financial Times when this story went live overnight. Whilst talk of a European Central Bank rate cut also helped, it was these words from the FT which really triggered the surge:
Eric Dinallo, New York insurance superintendent, has met executives at the banks and has strongly urged them to provide $5bn in immediate capital to support the bond insurers, the largest of which are MBIA and Ambac, and to ultimately commit up to $15bn.
Dinallo fancies himself as the new Eliot Spitzer and the market absolutely loved the speculation because Ambac shares soared 72%, albeit from a very low base, and MBIA rocketed 32.56%.
Not since the Federal Reserve co-ordinated the rescue of Long Term Capital Management in 1998 have we seen anything like this, but you have to ask yourself why capital-starved banks would want to stump up $US15 billion.
Business Spectator has a good package on the “bond insurance crisis”, explaining why it is at the epicentre of the global credit meltdown.
It’s pretty gloomy but you start to understand why this $US15 billion bail out is a better option than having to mark down the value of bonds after MBIA and Ambac lost their AAA ratings as would inevitably happen if they can’t raise a truckload of capital.
Wall Street has to pick its poison here. Insurance collapses are the messiest of all, as we saw in Australia with HIH, so saving the two biggest sub-prime loan insurers makes a lot of sense. Call it a $US15 billion stitch in time.
The great thing about the Americans is the speed with which they deal with a crisis. Look at the rapidity of those sovereign fund bailouts which now, ironically, will seemingly see some of their funds directed into the bond insurers.
The likes of China, South Korea, Singapore, Japan and the various Middle Eastern sovereign funds are huge holders of US bonds – especially federal government issues – so the last thing they want is a full-on bond market rout caused by defaulting insurers.
The big question in such a bailout is where any US Government and State of New York guarantee would fit in and how the liabilities would be structured to keep them off the balance sheets of the Wall Street banks.
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