Although the absence of availability of Bond Insurance is not mentioned in the linked blog, its absence is starkly illuminated by this report about the woes faced by Munis issuers who until recently could not find many takers: Money & Co., "'Barack Attack': Muni Bond Demand Rises On Tax-Hike Fears" (Los Angeles Times Online, Business Section, posted Friday, November 7, 2008).
The linked report posts information that some wealthy investors are buying munis because they are afraid that the President-Elect will seek to increase the tax rates on some wealthy people, as he promised to do during the recent presidential campaign. Id.
The implications of this event, if accurate, would be enormous. Local government entities have rarely if ever defaulted on the bonds they issue, called "munis". That fact is clear from several previous posts in this space.
As previous posts here also make clear, there are as a result hardly ever any Claims upon Bond Insurance Policies. The Bond Insurance Companies marketed their Bond Insurance Policies on the strength of their own high Credit Ratings. Their high Credit Ratings motivated investors to invest in munis protected by Bond Insurance Policies issued by Bond Insurance Companies with high Credit Ratings. High Credit Ratings of Bond Insurance Companies were the equivalent of stock in a store: The Companies "sold" their high Credit Ratings to local governments issuing bonds, who paid Premium money to the Bond Insurance Companies in order to sell munis to investors.
Rather than being content with collecting and investing Premium money with great success, and never paying Claims, instead Bond Insurance Companies lost their high Credit Ratings (abruptly, too) after the bottom dropped out of the market for credit derivatives. The same Bond Insurance Companies which once sold high Credit Ratings to local governments issuing munis, suddenly no longer have high Credit Ratings to sell.
Investors have reportedly resumed investng in munis even without the guarantee of Bond Insurance. Instead of a guaranteed return on a protected investment, these investors are afraid of paying higher taxes so they are investing in what were the safest investments of their kind all along: Munis, regardless of Bond Insurance or not.
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