Goldmans warns on $15bn monoline rescue

The US bank's finance chief expects the bond insurance bail-out to usurp the Long-Term Capital rescue for complexity

Dearbail Jordan

Goldman Sachs' chief financial officer predicted today that bailing out US monoline insurers will prove "more complicated" than the 1998 rescue of Long-Term Capital Management, the notorious hedge fund that was saved from collapse by a multi-bank finance package.

David Viniar said told a conference today: "It is likely that you will see some solutions to what's going on with the monolines."

A group of eight banks, including Britain's Barclays and Royal Bank of Scotland, are working with the New York Insurance Department, on a $15 billion bail-out plan for the monoline insurance industry.

Monoline insurers underwrite one type of debt i.e. bonds, against default. The combined industry insures $2.4 trillion worth of bonds and, after branching out to underwrite bonds containing sub-prime mortgage debt, these companies are now facing huge losses.

In 1998, private banks and financial institutions provided funding to rescue Long-Term Capital Management, a US hedge fund giant whose collapse threatened to wreak havoc on both the domestic and international financial markets.

Mr Viniar said that there are a "number of companies who are involved in a lot of different things", adding that rescuing monolines from their current perilous state is "going to be more complicated'' than the industry bailout of hedge fund Long-Term Capital Management.

Last week, MBIA, the world's largest bond insurer, announced a $2.3 billion loss for the fourth quarter. William Ackman, of the Pershing Square hedge fund, calculated that the sub-prime crisis would eventually cost MBIA $11.6 billion.

In 1998, the US Federal Reserve stepped in to rescue Long-Term Capital Management after a number of complex deals involving more than $1 trillion went bad, resulting in the hedge fund losing $1.9 billion in just one month.

At the time, William McDonough, President of the New York Federal Reserve Bank, said: “The abrupt and disorderly closeout of Long-Term Capital’s positions would pose unacceptable risks to the US economy.”

• Have your say

As The Economist pointed out in an article last July - William Ackman deserves huge credit not only for spotting the monoline problem some five years ago - but also for risking public derision for airing his views and sticking by them despite being dismissed as a doom-monger. He was right five years ago and he is even more right now - shame no one else was prepared to listen.

Huw Sayer, Norwich, England

These institutions: the bastions of the free market, are the very same hypocrites who do not hesitate for a moment to remind us all about the iniquities of socialism, but don't mind adopting it when it is convenient.
"Unacceptable risks ..." apparently does not apply to the gamblers in the casino of the 'free market' with their greed subsidised ultimately by those at the bottom of the chain.

P.S. As if you really care what I think!

R Mc Guinness, Dungog, Australia

The worst is yet to come.
We have only just started the unravelling. All the various factors that created this virtuous cycle of credit will reverse. From virtuous to vicious.

fuguez, mayfair/london,