Nietzsche and MonolinesFast forward five years. I met the head of a monoline insurer last week. Trying to be polite, I said that it would no doubt be necessary to change the business model. The reply was short, clear and not to be repeated in this blog, but the essence was that the old monoline model is dead. This man was moving his business model well away from the old monoline approach.
Which brings us to what Nietzsche can teach us about the current markets: "Umwertung aller Werte" ("Revaluation of all values"). There are many people in the market yearning for things to be as they were. It isn't going to happen, just as we're not going back to primary school.
Setting aside those who go on about "transparency" more as a Pavlovian reaction than a subtle analysis (I've been hearing this in one form or another for 15 years or more), we need to answer the basic business question as to how we get funding from those who have it to those who need it. Traditional securitisation is not the answer, certainly at present. There are several possible ways forward-for example, I'm currently involved in a Sharia-compliant trade financing project.
But one which to my mind has a real future is covered bonds.
Covered bonds are far more flexible than in the past; are simple and transparent; and can be based on a wide range of assets, not just mortgages and public-sector debt. In addition, the "moral hazard" problem is not there, since the issuing bank is fully liable for the debt.
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