Monoline financial guaranty insurer
A specialist insurer that guarantees payments on a bond, lending its rating to the borrower until that rating is itself lost.
In January 2008 the rating agencies began pulling Ambac's triple-A, and MBIA's soon after. Thousands of U.S. municipal bonds lost their rating along with their guarantor, even though the credit of the issuing cities, counties and school districts had not moved. A monoline guarantees interest and principal on a bond issue: the borrower prices off the guarantor's rating and hands back part of the spread savings as premium. In munis, where historic default rates are very low, the model held for decades. It rested on a condition no offering document spelled out. A wrap is worth something only while the guarantor outranks the issuer, and every notch the monoline loses is passed straight through to its whole book of insured paper. When the monolines took the business into mortgage securitizations and super senior CDO tranches, they put AAA-rated promises behind a correlated exposure that portfolio size no longer diversified. The risk transfer had moved correlation onto the guarantor's balance sheet, and the guarantee behaved like a reflexive asset. Wrapped munis are still written today, on a share of new issuance far smaller than before 2008.
The successive downgrades of the United States monolines MBIA and Ambac from January 2008 stripped the triple-A rating from thousands of municipal issues they guaranteed, although the credit quality of those issuers had not changed.
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