monolines lust for CDO undercut its success

--They serve as CDS and CDO insuers, beside insuring Muni bonds of 2.6 trillion market. --Credit-rating downgrades may prompt forced sales byinvestors that are restricted to holding the highest-gradebonds, as well as further losses at banks that have alreadywritten down more than $130 billion on failed investments. --``Forced selling triggered by a downgrade of the monolines would lead to a further deterioration of an already distressed market,'' Felsenheimer wrote. --in the CDO market, the tipping point came last year when the three major rating companies downgraded thousands of CDOs. Ratings on morethan 2,000 CDOs were cut in November alone, with Fitch loweringCDOs backed by subprime mortgages 9.6 levels on average,according to a Dec. 13 UBS AG research report. Rating cuts on CDOs and other securities backed by subprime mortgages and home equity loans led S&P to conclude bond insurers faced potential losses of $19 billion --The first to fall was ACA Capital Holdings Inc., whose ACAFinancial Guaranty Corp. unit guaranteed $26.6 billion of CDOsbacked by subprime mortgages, according to S&P. S&P slashed ACA Financial's rating to CCC, a low junk --By using swaps, ACA wasn't limited to guaranteeing onlysecurities with a lower credit rating than its own. It could compete with AAA-rated insurers to back top-rated CDOs whilehaving to maintain less capital than the triple-A companies. --top-rated insurers collected annual premiums for insuring CDOs with swaps that were 50 percent of the capital the ratingcompanies required them to maintain, S&P said in a July 2007 overview of the bond insurance industry. ACA was scooping uppremiums that were 130 percent of its required capital. --Annual premiums on CDOs averaged 50 percent of the capital that the rating companies required the insurers to set aside,according to S&P. That compared with an average risk-adjusted profit ratio of 8 percent for insuring other types of structured-finance securities. --Buffet is making inroads...