Bailing out

It's always nice to see the New York Times catch up with you. I first posted on this several weeks ago. (Of course, it wasn't just me. Others in the blogosphere were talking about it too). Today, the New York Times catches up:

Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.

That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.

However, the supposed fix that seems to be in the works doesn't make much sense to me. The banks that are protected by the now failing insurance companies are going to bail out the failing insurance companies so that the protection won't fail. As Atrios says, this is a bit like bailing water from the left side of the boat and pouring it back into the boat on the right side. (Yeah, I know, on a boat it's supposed to be port and starboard, but Atrios used left and right).