Chillin' out till it needs to be funded
Even as being in the know, the markets and myself thought we knew where the banks were headed; the banks’ synthetic desks on both sides of the Atlantic leaked news of a fresh resurgence in complexity as a business to tie up some returns and some solvency in the banking system.
Goldman Sachs went in for a slice of the monoline insurance business according to the FT. Goldman Sachs can still figure out business entries without becoming part of the retail or wealth club, opening up Corporate and Institutional Business with a small reinsurance plant on the window. Goldman Sachs added Bermuda based reinsurer Ariel Holdings to its portfolio of acquisitions and advertised its entry into the monoline insurance business, i.e. credit wraps for Municipal bonds and other such high yield and apparently non leveraged bonds that need credit enhancements. Goldman Sachs believes the ‘underwriting’ in this business is based on the lendee’s reputation and as of now there is no doubt that adding their name to the lendee as guarantee will only increase the credit rating of the debt offering. Credit wraps are not the only product monoline Financial guarantees looking at basically just providing an insurance policy to be bought by the debt holder
Monoline reinsurance is unlike CDS insurance in that there is no Secondary market currently for the policies and they add to the credit product being traded or sold. Also CDS can be issued against a City, Government , Corporation or as in most cases Industry, triggering payouts on the entities’ credit condition while the Monoline policies can only be bought by the holder of the debt or Credit wraps added to the muni during issuance, sharing the credit risk of the issuer and thus controlling the yield at which the instrument is issued.
Goldman Sachs would prefer secured collateral based insurance as it has been doing pre crisis with AIG alone, with AIG posting collateral for the enhancements offered.
FT breaks the story based on the job classified posted at the Goldman Sachs website.