Abstract
The financial meltdown that began in 2007 revealed problems with the financial guarantee insurers and regulation of these insurers. Financial guarantee insurers, with business models dependent on AAA-credit ratings, were exposed to risks that threatened those ratings. These insurers had four primary sources of risk: the proportion of structured finance in the insurance portfolio, the proportion of structured finance in their investment portfolio, selling credit default swaps, and providing guaranteed investment contracts. These exposures provided a toxic mix once the structured finance market faltered and credit ratings fell. We examine these risk exposures and the failings of the regulatory framework of these insurers.
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