It shocks me that this "plan" is touted in the media, as if it makes any sense at all.  Let's run it down together.

The banks are being asked by the insurance regulators (and basically everyone else) to re-capitalize the monolines.  You see, it is in their interest to do so, as a downgrade of the monolines will result in very large losses on bank investments.  So its "cheaper" to re-capitalize the insurers of those investments, than take the downgrade on the investments. 

So the banks are going to provide capital to the monolines, so they can insure their investments, and keep them at AAA.

This is absurd on the face of it!  If you are providing capital to a guarantor, how much value can that guarantor provide you?

Say I decide I have a homeowners policy, and I find out the insurance company is in trouble.  They tell me I will not be able to file a claim on my newly damaged house, unless I give them money to pay the claim!  So if all of us suckers will simply give them one dollar, they will make it into hundreds to pay us all!

Absurd.  

But let's just say this goes through, which looks dubious.  I have a modest proposal, for how the insurance companies can pay for this new capital.  They can insure the debt of the banks, and bring it up to AAA!  If anyone does not believe it will hold, the banks can send over another check, and AAA is restored.  

That is only one step further in absurdity.  The monolines are a fraud, and this "plan" is an act of financial desperation.

The market will not be fooled.  Don't you be fooled either.