Counties, universities and hospitals issue bonds to raise revenue. They and other bond-issuing entities reportedly have a default rate of one-tenth of one percent, or 0.1 percent.
Compard to the subprime collapse, that is astronomically good for investors. No logic here though.
Bond Insurance Companies sprang into existence because at the time, circa 1973, bonds were viewed as risky investments. Cities, counties and other government entities authorized to issue bonds (instead of raising taxes) did not attract credit ratings high enough for the influx of capital they wanted. Bond Insurance Companies, however, had high AAA credit ratings at the beginning, and they were able to transfer their AAA ratings to the bonds they insured. In this case, the financial rating of Bond Insurance Companies was a measure of their capacity to pay claims -- which they apparently hardly ever had to do.
Times have changed dramatically. However, the investors' perception of bonds as risky investments persists. Bond Insurance Companies are being removed from the picture as their financial ratings are quickly lowered since they dabbled for years in guaranteeing or insuring the payback of mortgages secured by subprime securities that they sometimes could not spell like collateralized debt obligations (sp).
Now, counties, universities and hospitals that issued bonds, for example, are having to pay greater amounts of money on bonds they have already issued and in many cases, are putting off issuing new bonds and thus postponing planned capital improvement projects. Martin Z. Braun, "Bond Insurance Turns Toxic For Munis as Rates Soar (Update 1)" (Bloomberg.com, Monday, February 11, 2008). For want of a nail, the shoe was lost ... and for want of a Bond Insurance Company's credit rating, the bond was lost -- and the municipal, hospital or other public improvement along with it.
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