Claims And Issues

The return of the Munis!

               Municipal bonds are in the news again.  They took a long vacation during the Great Recession, due largely to the failures of municipal bond insurance companies which resulted from taking on credit default risk and straying from a lucrative but boring business of simply insuring municipal bonds.

               Before the Great Recession, and during the Great Recession including the present time, municipal bonds are the same as corporate bonds, only different:  Municipal bonds rarely default, unlike corporate bonds which default a lot more often.  These comparative rates of default are not reflected in the cost of their insurance policies, however, as municipal bond insurers set high rates in a niche market.  There just have not been many alternatives open to local government bodies that wish to obtain insurance to protect their bonds (and so give confidence to their bondholders).

               Now, some call into question whether the very low default rate of municipal bonds is threatened by unfunded local government pension plans.  See Tara Siegel Bernard, “Your Money / Municipal Bonds Not Really So Scary” p. B1, col. 3 (New York Times Nat’l ed., “Business Day” Section, Saturday, July 25, 2015).

               What is scary is the spectacle of municipal bond insurance companies issuing policies to cover risks unrelated to their core business.

Please Read The Disclaimer.  ©2015 by Dennis J. Wall, author of “Lender Force-Placed Insurance Practices” (American Bar Association 2015).  All Rights Reserved.

BOND INSURERS AGAIN MAKE HEADLINES FOR RISKY UNDERWRITING, PAY PRICE.

    Bond insurance companies have made news again for policies they issued in the past to cover municipal bonds of dubious value:

 Some financial creditors, like the bond insurer Syncora Guarantee, will get about 14 cents on the dollar for their debts, a low recovery rate but not as low as the city had initially proposed. Syncora and Financial Guaranty Insurance Company had insured a type of debt that was never very secure to begin with, and the city contended that low recoveries were appropriate given the level of risk.

Moncia Davey and Mary Williams Walsh, "Plan to Exit Bankruptcy is Approved for Detroit" p. A11, col. 1 (New York Times Nat'l ed., Saturday, November 8, 2014).

    Bond insurers' wanderings from the far-less-risky fields of coverage which they previously occupied has been the subject of many headlines here and elsewhere since the Financial Fiasco that burst into the open in 2007-2008.  See, e.g., "Bond Insurance Premiums May Not Mean Protection for Munis" published here on January 8, 2014; "Gaming the Muni System:  Another Kind of Muni Bond Insurance?" published here on May 23, 2010; and "Bank Bailouts, Bond Insurance, and a Better Way" published here on November 21, 2008.  See also the many other articles archived here under the category of "Bond Insurance".

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Related articles

Cities, states urge U.S. to let banks treat munis as liquid assets

Detroit bankruptcy teaches muni bond investors painful lessons

Detroit Settles with Bond Insurer; Chance of Debt Plan Success Boosted

BOND INSURANCE PREMIUMS MAY NOT MEAN PROTECTION FOR MUNIS.

           It is an interesting but little-known fact that muni bonds do not default nearly as often as corporate bonds.  Muni bonds are issued by small public entities like counties, cities, water districts and the like.  Corporate bonds are issued privately by corporations.  Both types of bonds are issued to raise money.

          There are major differences between the two categories.  As was already pointed out, public muni bonds default at a much lower rate than private corporate bonds.  That is a fact.

          Muni bonds also carry bond insurance at starkly high premiums compared to the premiums on bond insurance for private corporate bonds.  That's a major difference between the two categories right there.  These and other characteristics are highlighted in years of articles posted here under the category of Bond Insurance, including for example "Municipal Bond Insurer MBIA Back in The Headlines," posted on March 21, 2012, and "Gaming the Muni System:  Another Kind of Muni Bond Insurance?" posted on May 23, 2010.

          Since muni bonds default far less often than corporate bonds, the comparatively higher premiums charged by bond insurance companies to munis for their bonds do not appear to be based on the lower default rate of muni bonds.  The premiums charged by bond insurance companies to munis for insurance on muni bonds almost certainly have to be based on something else.  Perhaps that something else is one of the constants of modern finance, return on investment or "ROI".

          That would make bond insurance something like return-on-investment insurance, not insurance at all really, but something of a guarantee or hedge against an unexpectedly low return on the bond investor's investment.  In this sense, muni bonds can only be sold and traded if they are backed by bond insurance, which is close to the reality of the situation.  Prospects for muni bond investments in 2014 do not appear to be good, in any case.   Walter Hamilton, "Investing Quarterly / Muni Bond Forecast:  Cloudy in 2014 / Last Year, Bonds From States, Cities and Counties Suffered Their Worst Annual Performance Since 2008 and Only Their Fourth Losing Year Since 1990" (Los Angeles Times Online, posted Sunday, January 5, 2014).

          If on the other hand premium rates for  insurance on muni bonds are somehow linked to bond default performance, then premium rates for muni bonds would seem like an offer of nothing-for-something as it were.  Bond insurance companies would then be charging high rates for insurance that is not necessary, if the premium rates for muni bond insurance were actually based on the chances of muni bonds defaulting, which doesn't happen as a rule.

          Who ever knew that the basis for insurance premiums could reveal investment strategies or financial schemes at work?

 

 © 2014 by Dennis J. Wall.  All rights reserved.  No claim to original U.S. Government works.

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Municipal Bond Insurer MBIA Back In The Headlines.

    After being out of the newspaper headlines for a couple of years, Municipal Bond Insurance Company MBIA is back.  Take a look at this report by Peter Lattman, "Insurer is Said to Forgo Bonuses Under Pressure" p. B5, col. 1 (New York Times Nat'l ed., "Business Day" Section, Tuesday, March 20, 2012).  This print report was slightly rewritten and posted online in "Dealbook" Blog on the New York Times website.

    Since dropping out of the headlines temporarily, MBIA has been a Plaintiff and a Defendant as a result of straying into fields full of Mortgage-Backed Securities.  It has been sued by investment Banks alleging Fraud, and it has sued Bank of America and Countrywide Financial alleging Fraud.  Id.

    More important, MBIA was allowed by the then-Department of Insurance of the State of New York to split into two MBIA's if you will:  a comparatively healthy MBIA, which contained its still profitable, and traditional, "municipal bond insurance business" and a very sick MBIA, with "crippling exposure to toxic mortgage-backed securities."  Id.

  Reportedly, the New York Department of Insurance (whose functions are performed in 2012 by the New York State Department of Financial Services) has done MBIA a more recent good turn.  The Department successfully convinced the persons who operate MBIA not to give themselves "bonuses" under the circumstances.

    Some people can learn to carry a tune, even if at first they seem to be tone deaf.

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BP Oil Disaster Hits Insurance Sonar Screen.

   "BP brought another $25 million to Florida on Tuesday, [June 8, 2010,] but instead of a thank you they got a lot more criticism."  Brent Kallestad, "Florida Politicians Demand More, Faster Claims Monies From BP" (Insurance Journal Online, Thursday, June 10, 2010).

   Those ungrateful "Florida politicians".  What were they thinking?  Not grateful for a disaster that has caused BP to try to purchase absolution at a lower price than Florida Juries might otherwise award and assess in Compensatory and Punitive Damages?  Not sufficiently thankful for potential elimination of Florida's Number One Industry -- Tourism -- on the Florida Panhandle Beaches, and perhaps at other Florida locations to come depending on where BP's oil plumes land?

   Not sufficiently grateful, indeed.  BP is trying to buy their way out of a potentially much higher Judgment.  And keep much of the Billions it has made as a result of its flawed business model which clearly requires other people to shoulder much or all of the risk of this deepwater drilling fiasco, while BP receives Billions of Dollars in profits that result.  Grateful?  Get real.

   This being business, investors have more or less naturally taken a business view of BP's exposure.  BP's stock is trading today for an amount that is less than the amount by which the share price has fallen in the past two months:  Down $33.30 per share from some $62.50 a share in mid-April, to $29.20 a share at the close on Wednesday, June 9, 2010.

   At the same time, BP's costs of doing business are increasing in many ways in addition to the obvious prospects of liability for cleanup costs, economic damages, other Compensatory Damages, and Punitive Damages:  "The annual cost to insure $10 million in BP bonds rose by $10,600 to $36,800," according to a report published in the Wall Street Journal on Thursday, June 10, 2010.    See Guy Chazan and Stephen Power, "U.S. Ramps Up Tab On BP" p. A1, col. 3 (Wall Street Journal, Thursday, June 10, 2010).

Postscript Sunday, June 13, 2010 to the above post which was originally published here on Friday, June 11, 2010: 

The Florida perspective on the continuing BP disaster of death and destruction is also explored in an informative post on "Venture Blog" on Monday, June 7, 2010, written by Robert Trigaux, "Will BP Oil Ruin Florida Coastline Because of Inadequate Resources to Clean Up the Mess?" 

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Gaming the Muni System: Another Kind of Muni Bond Insurance?

   Bid-rigging on auctions for Guaranteed Investment Contracts or "GIC's" are another class of protection for financial interests, according to a comprehensive article by Martin Z. Braun and William Selway, "Conspiracy of Banks Rigging States Came With Crash (Update 1)" (Bloomberg.com, Tuesday, May 18, 2010).  This article is nicely condensed in a newspaper blog post by Robert Trigaux on Wednesday, May 19, 2010 on "Ventures" Blog in the St. Petersburg Times.

   Reportedly, Bloomberg has unearthed a "conspiracy" of "kickbacks" "in which financial advisers to municipalities colluded with" banks and traders to guarantee that the banks and traders paying kickbacks would land contracts to manage the income raised by the auction of Taxpayers' Guaranteed Investment Contracts.  Bloomberg reports that its investigation was massive:

   The workings of the conspiracy -- which stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and non-profits -- can be pieced together from the Justice Department's indictment of CDR [CDR Financial Products, Inc.], civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials.

Martin Z. Braun and William Selway, Bloomberg.com, supra. 

   This gives a new twist to the meaning of "Bond Insurance".

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Orlando Basketball Bonds May Bounce; So-Called "Insurance" Demanding Payback.

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   The City of Orlando may default on bonds issued for the purpose of constructing a new basketball arena, it is reported on this Sunday morning by Mark Schlueb and David Damron, "Orlando Risks Bond Default, Experts Warn" p. A1, col. 3 (Orlando Sentinel, Sunday, April 4, 2010).

   The reported reason for the potential default is the decline in tourism since the bonds were issued.  Id.  Apparently people from outside of Orlando are not spending money in the numbers they used to spend money in Orlando, partly because there are fewer people from outside of Orlando who are in Orlando to spend money.

   The City of Orlando has apparently been paying money to maintain a so-called "insurance policy" issued by an unknown, unnamed company.  The "insurance  policy" has an unfortunate feature, as reported in the linked newspaper article:

The city bought an insurance policy that kicks in if the reserves are drained, though the insurance money would eventually have to be repaid with hotel taxes.

The major if not only kind of "insurance policy" that requires Policyholder payback when the Insurance Company pays Claims is a "fronting policy".  That is just like it sounds, a policy under which the Insurance Company "fronts" payment of Claims under a Policy issued in its good name, in exchange for payback by the Policyholder of all the Claim payments made by the Insurance Company.

   The author has sent an EMail to the reporters on the day of drafting this post, asking for the name of the insurance company and a copy of the "insurance policy".  If that currently missing necessary information is obtained, it will certainly be reported here.  And more than those things:  The event of "draining reserves" of the City's treasury sounds very like an "event of default" which is a trigger for payment on Credit Default Swaps and on Collateralized Debt Obligations, which in basic terms are groups of Credit Default Swaps.  What if any CDSs and CDOs has the City obligated itself or otherwise entered into with Taxpayer money here?

   There is more at work here than an unknown, unnamed "insurance policy".  Stand by.  Further developments will be by presently.

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Bond Insurance Still Has Market -- UPDATE: Yes, Munis Resume Bonds.

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   This is an update to a post here on February 5, 2010 entitled, "Bond Insurance Still Has a Market?"

   Yes, it apparently does.  The State of California reportedly is set to resume issuing Municipal Bonds or "munis".  California will soon issue bonds totaling $4,000,000,000.00 or $4 Billion for specifically designated "capital projects," and they are not designed for general revenue.  See Tom Petruno, "Big Bond Deals Ahead:  California Plans $4 Billion in Muni Sales" ("Money & Company" Blog, Los Angeles Times Online, posted Saturday, February 20, 2010).  (The rollout date for the bond sale was pushed back to March 11 by the California Treasurer in order to allow more time for the California state legislature to review the plan.  Romy Varghese, "California Postpones Bond Sale" p. C7, col. 4 (Wall Street Journal, Thursday, February 25, 2010), subscription required for online access.)

   California's planned Muni Bond sale comes after the State of Illinois reportedly sold $1,500,000,000.00 or $1.5 Billion "in tax-free bonds".  Id.  This is part of what appears to be a re-emerging munis market:  "State and local governments sold about $5.8 billion of fixed-rate, tax-exempt bonds this week, the most in more than a month, led by Illinois's $1.5 billion refinancing to cut interest rates on existing debt."  Jeremy R. Cooke and Brendan A. McGrail, "Tax-Exempt Sales Reach 5-Week High Led by Record Illinois Issue" (Bloomberg.com, Friday, February 19, 2010).

   Bond Insurance is not back to where it was, however.  Bond-issuing local government authorities have limited their use of Bond Insurance considerably in the face of a near-total failure among Bond Insurance Companies.  Bond Insurance is reportedly carried by "less than 10 percent of the market".  Id.  More a scalpel than a cleaver in the current munis market, Bond Insurance has been  used "'to deepen the investor pool.'"  John Sinsheimer, "director of capital markets for Illinois," quoted in id.  The Illinois authorities thus selectively insured "about $500 million of its [$5.8 billion] deal with insurance against default from [a Bond Insurance Company], rated AAA by Standard & Poor's."  Id.

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Nuclear Reactor Building Project Guaranteed by Feds, Not by Bond Insurance.

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   The first nuclear power plant to be built in the U.S. since the Three Mile Island accident in the 1970's, is being financed by Bonds and apparently totally without Bond Insurance.

   One party's interest in the plant is reportedly being financed by a combination of mostly (taxable) Build America Bonds and some tax-exempt bonds.  The total debt launched in this way by Municipal Electric Authority of Georgia, a publicly owned utility, is some $2,500,000,000.00 or $2.5 Billion. 

   Terms of the entire deal include conditional loan guarantees offered by the Federal Government to the owners of the nuclear reactor:  Georgia Power's parent, Southern Company, and Oglethorpe Power Corporation.  The amount reportedly guaranteed:  $8,300,000,000.00 of a total projected cost of $14,000,000,000.00, or $8.3 Billion out of a total estimated cost of $14 Billion.  See Kelly Nolan and Romy Varghese, "Nuclear Solution:  Muni Bonds" p. C6, col. 1 (Wall Street Journal, Thursday, March 4, 2010).

   Bond Insurance is not even mentioned as a part of this plan.

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Derivative Contracts (Some) Feature Bond Insurance, So ... Regulate as Insurance.

    **Author's Note:  If you have reached this blog through a list that carries advertising, your computer may or may not be put at risk either through the list or through the advertising.  I do not accept or authorize any commercial advertising of any kind on any list or post.  Placing commercial advertisements with or near any of my web log posts is prohibited.  Further, I do not recommend any products or services advertised with or near any of my posts or any list of my posts.**

   Derivatives contracts are complex.  So complex that in order to understand them, the great majority of commercial investors (let alone average people) have to hire "quants" or mathematical gurus to guide them through the complexities.

   The complexity of derivatives contracts is not to be minimized nor denied.  They are deliberately made complex.  Since they are so complex, they have largely escaped regulation.

   Including Insurance Regulation.  Derivatives contracts offer "insurance, for example, on trading positions".  Louis Uchitelle, "Elders of Wall St. Favor Tight Rein" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Wednesday, February 17, 2009).

   A good explanation of the purposes and results of derivatives contracts is given by Christopher Emsden, "Derivatives Promise Pain for Italians" p. C2, col. 6 (Wall Street Journal, "Money & Investing" Section, Thursday, February 18, 2010) subscription required to access Online Edition.

   Mr. Emsden explains in his report that the debts assumed under derivatives contracts can last for 20 to 30 more years.  Greece reportedly used them on a large scale to avoid European Union Rules on the amount of debt member states are allowed to carry.  Municipalities in Italy have reportedly entered into $48,000,000,000.00 or $48 Billion worth of derivatives contracts.  "That is equivalent to almost a third of all debt held by Italy's regions, provinces and municipalities."  Id.  Italian municipal governments often used derivatives contracts "to protect public bond issuers against adverse interest-rate movements," Mr. Emsden reports.

   Not being very well versed, myself, in the world of derivatives contracts or in finance for that matter, I take this to mean that the municipal governments used derivatives contracts to insure against unwanted increases in the interest rates that they would have to pay on their bonds; in the event that the interest rate exceeded a certain amount, derivatives contracts would provide insurance which would pay all or part of the excess.

   Different kinds of derivatives contracts may serve the different purposes of different kinds of Insurance Policies.  The kind of derivatives contracts that are used by munis "to protect public bond issuers against adverse interest-rate movements" walk and talk like Bond Insurance.  Munis in the United States have suffered with Bond Insurance Companies and Credit Rating Companies, as readers of this space know.  See generally the posts filed on this site in the Category of "Bond Insurance".  It appears that in the future, munis in the U.S. may soon feel the same pain that munis in Italy are reportedly experiencing, with derivatives contracts, i.e., unregulated Bond Insurance.

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Bond Insurance Still Has a Market?

   Under Ten Percent (10%) of the "municipal bond market" insures municipal debt with Bond Insurance.  See Jeremy R. Cooke, "Arizona, Chicago Bond Sales Show Insurance Demand Persists" (Bloomberg.com, Thursday, January 14, 2010).

   It is reported that recent "municipal debt sales" by "Arizona" and the City of Chicago reflect a "demand" for Bond Insurance, however.  Id.

   Previous posts in this space document much of the history and fall of Bond Insurance Companies, before, during, and after the Great Recession through which we are now living.

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Bond Insurance Company Sues Insured it Issued Credit Default Swaps.

    MBIA issued a press release dated April 30, 2009 announcing a lawsuit which it and its subsidiary, LaCrosse Financial Products, LLC filed against their insured.  The defendant is Merrill Lynch, their Insured-Counterparty.  See also Jody Shenn, "MBIA Sues Merrill Lynch Over Sub-Prime Debt Protection (Update 2)" (Bloomberg.com, Thursday, April 30, 2009).

    Although MBIA posted that the Complaint itself was available on its web site, it was not yet located there the last time I personally tried to find it there.  A search this date on the "SCROLL" or "Supreme Court Records On-Line Library" site provided by the New York State Supreme Court, where the suit was filed, reveals that "no documents have been scanned" on this case as yet.

    The alleged claims or causes of action identified in the press release are Misrepresentation and Breach of Contract.  MBIA and LaCrosse allege that they were fraudulently induced to issue Credit Default Swaps and other Insurance Policies to Merrill.  The Bond Insurance Company seeks the remedy of Rescission for all CDS's and Insurance Policies which were issued to Merrill, and Damages "where the CDS Contracts and related policies were issued to third party counterparties [insureds] other than Merrill Lynch."

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Federal Taxpayer Funds: The New Corporate Bond Insurance.

    The only corporate bonds being traded at this time are reportedly "investment-grade" bonds issued by "high-quality corporate borrowers."  Floyd Norris, "Off The Charts/Corporate Bonds Sell (If There's a Safety Net)" p. B3, col. 1 (New York Times Nat'l Ed., "Business Day" Section, Saturday, April 18, 2009).  Those bonds are insured, if you will, by "government guarantees."  See id.  That of course means that they are insured by Federal Taxpayer Funds.

    Other types of financial devices, even with this form of 'insurance' which is about the only form of Bond Insurance available today, and even including "syndicated loans" which banks package up together and sell off as a separate item, are not doing nearly as well.  See id.

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Munis: TARP To Be Thrown Over Issuers and Insurers.

    According to a January 9, 2009 Press Release Outline of Legislation to Amend TARP, the Chair of the U.S. House Financial Services Committee Barney Frank (D-Mass.) will offer amendments to TARP, the Troubled Assets Relief Program, to "clarify" the Treasury Department's authority under the Emergency Economic Stablization Act of 2008 "to provide support to issuers of municipal securities for new issuance or remarketing of existing auction rate securities."  [Emphasis added.]

    Whether and how these proposed amendments will work remains to be seen, of course.  Time will tell.

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UPDATE 1: Goldman Markets Munis, Sachs Issues Credit Default Swaps.

   This is an update to a post that appeared here on Insurance Claims And Issues on November 12, 2008.

     Previously, it was reported that Goldman Sachs had caused a furor in California by recommending credit-default swaps on municipal bonds in California because Goldman was also the managing underwriter of municipal bonds in California.

    It is now reported that Goldman Sachs has recommended credit-default swaps to its customers in at least 11 States to one degree or another:  Florida, Connecticut, Hawaii, Illinois, Massachusetts, Michigan, Nevada, New Jersey, Ohio,.and Wisconsin in addition to California.

    Goldman Sachs reportedly "has acted as lead managing underwriter [of municipal bonds] in all the states it recommended betting against, except Hawaii."  Joe Mysak, "Goldman Draws Ire For Advising Default Swaps Against New Jersey" (Bloomberg.com, Wed., December 10, 2008).

A related post appears on Insurance Claims Bad Faith at www.insuranceclaimsbadfaith.typepad.com.

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Better Ways Than Bond Insurance? Credit Ratings May Drive Diversification.

    Moody's investors Service has recently done an incredible thing in many ways.  In downgrading the Credit Ratings of two (2) Bond Insurance Companies that compete with a Bond Insurance Company owned by Moody's parent, Berkshire Hathaway, Moody's analysts reportedly wrote something astonishing.

    They reportedly wrote that the business model behind Bond Insurance no longer exists.  This is what they said:  "'The downgrades primarily reflect Moody's view that the business model of financial guaranty insurance has been damaged over the past year due to sustained turmoil in credit markets and the very poor performance exhibited by a number of guarantors.'"  Quoted in Jody Shenn, "Assured, FSA Stripped of Aaa Ratings by Moody's (Update 1)" (Bloomberg.com, Friday, November 21, 2008).

    Further, the Moody's analysts expressed their view that from now on it will be "'quite challenging'" for a guarantor of only municipal debt to get or keep a Aaa Credit Rating from Moody's.  Id.

    This is perhaps also a belated recognition of reality:  The Bond Insurance market was made only three (3) decades or so ago by financial manipulators and not in response to a real need for Insurance, or guarantees, of municipal bonds ("munis").

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UPDATE 1 to Bank Bailouts, Bond Insurance, and a Better Way.

    It was previously posted in this space that, among other things, Dexia sold Bond Insurance Company Financial Security Assurance ("FSA") to Bond Insurance Company Assured Guaranty Ltd.  It is now reported that Moody's Investors Service has reduced the Credit Ratings of both FSA and Assured below the point at which either can successfully issue Bond Insurance Policies.  See Jody Shenn, "Assured, FSA Stripped of Aaa Ratings by Moody's (Update 1)" (Bloomberg.com, Friday, November 21, 2008).

    After these two downgrades, Moody's rates the Credit of only one (1) Bond Insurance Company at a level high enough to write Bond Insurance if the past is any guide:  Berkshire Hathaway Assurance Corp.  See id.

    Berkshire Hathaway is heavily invested in Moody's Investors Service.

    Assured and FSA now  join MBIA, Ambac and three other Bond Insurance Companies which used to have Credit Ratings by Moody's high enough to write -- and collect Premiums, of course, for writing -- Bond Insurance Policies, but are likely no longer rated high enough by Moody's to effectively compete with Berkshire Hathway Assurance Corp. in the Bond Insurance arena.  See id.

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Bank Bailouts, Bond Insurance and a Better Way.

    News of significantly vast potential to achieiving a successful combination of "Bank Bailout" using Taxpayer Money, coupled with Private Capital Injection, has surfaced very recently:   Jody Shenn and Fabio Benedetti-Valentini, "Assured Guaranty to Buy Dexia's FSA Bond Insurer (Update 4)" (Bloomberg.com, Friday, November 14, 2008).  In this seemingly arcane report of business dealings, a report seemingly without meaning except to the companies involved, a way is shown to achieve success where success has not been achieved by the current U.S. Treasury Department and Federal Reserve.  It took a combination of Taxpayer Funds and a new CEO who reportedly is interested in reducing risk of the kind associated with the worldwide financial failure rather than, say, obtaining a new installment of more Taxpayer Funds.

    Dexia SA is a bank.  It is reportedly the largest lending institution to local governments in the world.  In September, 2008, Dexia received a "lifeline" or bailout from the governments of France, Belgium and Luxembourg to avoid its own collapse following the bankruptcy filing of Lehman Brothers in that month.  The bailout is reported in the linked newspaper article as amounting to $8.1 Billion.  Dexia's share price reportedly fell 74% in 2008.  

    Dexia SA sold its Bond Insurance business in a private deal with another corporation.  In the November deal, Dexia arranged for a private capital infusion -- after the September bailout -- by which Dexia will receive $361 Million in cash.  Dexia will also obtain a 24.7% share of the buyer, a Bond Insurance Company, Assured Guaranty Ltd.

    The Bond Insurance business sold by Dexia to Assured Guaranty is called Financial Security Assurance, Inc.  Reportedly, Assurance Guaranty purchased all of FSA's "insured portfolio of $425 billion, of which $110 billion was asset-backed securities".  Id.  ("Asset-backed securities is a euphemism.  According to the free online encyclopedia, Wikipedia, Collateralized Debt Obligations are unregulated asset-backed securities:  link here.)

    The private deal does not include a much smaller "$16.5 billion financial products portfolio" held by FSA.  Shenn and Benedetti-Valentini, supra.  This foolish investment portfolio remains with FSA.  Undoubtedly, it is the main reason for the $8.1 Billion bailout by France, Belgium and Luxembourg.   Two of those three nations, France and Belgium, will reportedly guarantee FSA's "assets."  

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Bond Insurance: States, Cities Sell Bonds ... Still Need Bailouts.

    The finances of States, Counties and Cities appear to be in bad shape.  Things may only be getting worse.  Munis and Insurance or guarantees are not the whole story, not any more, not now.

    As readers of this space know, "munis" is short for "municipal bonds," a broad one-word identification of all kinds of State, County, City and other Local Government-issued Bonds.  Recently, Bond Insurance Companies became unable to sell Bond Insurance.  Unregulated non-Insurance Companies have offered Credit-Default Swaps instead of Insurance as supposed guarantee agreements on the bonds.  Some reports are that munis are not sellling; other reports have it that wealthy investors are buying munis anyway in order to avoid taxes under the incoming Administration.

    Local Governments are facing financial situations that go way beyond munis.  Their problems include paying higher returns on munis in order to entice investors.  However, the fiscal problems of Local Governments reportedly only include munis and are not by any means limited to munis.

    Governors in States including California and  New Yok  are expressing needs for a Federal bailout.  Some of the problems States face at this time Include cuts to higher education.  Courses are being cut, instructors are being released, and tuition is climbing rapidly at a time when people cannot easily afford increased tuition in particular.

    The States are also concerned about their share of Medicaid reimbursements.  More people are rapidly and involuntarily joining the ranks of the unemployed.  They lose access to Employer-provided  Health Insurance Plans.  Medicaid, where available, assumes greater and greater importance as a social safety net. 

    Further, States are searching for ways to fund their Unemployment Insurance Funds.  Reportedly, New York, Michigan, Indiana, Ohio and Souh Carolina have reserves on hand adequate to pay 3 months or less of the average Unemployment Insurance Benefits in their States.  See, .e.g,, Keith B. Richburg and Ashley Surdin, "Facing Shortfalls, States Seek Emergency Aid From Washington" (Washington Post.com, Sunday, November 16, 2008).  See generally Jennifer Steinhauer, "Facing Deficits, States Get Out Sharper Knives/Huge Revenue Decline/Deep Cuts, U.S. Loans, Hiring Freezes, Taxes Are All on Table" p. A1, col. 1 (New York Times Nat'l Ed., Monday, November 17, 2008).

    Philadelphia, Atlanta and Phoenix are Cities that have already applied to the current U.S. Treasury Department to participate in receiving bailout funds.  San Jose, Los Angeles and San Francisco are reportedly readying their own applications for bailout assistance, too.  Reportedly, if the Federal Taxpayer Funds are received by these Cities they will be used for a variety of purposes including construction projects, pension and retirement costs, water-treatment facilities, and transportation projects.  Adam L. Cataldo and William Selway, "U.S. Cities, Reeling From Deficits, Seek Bailout Cash (Update 3)" (Bloomberg.com, Friday, November 14, 2008).  See, e.g., Money & Co. Blog, Los Angeles Times Online, Business Section, "Philly, Atlanta and Phoenix Ask Treasury For $50B For Cities" (Posted Friday, November 14, 2008).

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Goldman Markets Munis, Sachs Issues Credit Default Swaps

    Bonds issued by local governments, known as "munis," have rarely if ever defaulted.  They have probably never needed to be backed by Bond Insurance.  As many readers of past posts in this space have read here, Bond Insurance made its appearance in a market that was 'created' for it, a market that never previously existed -- and was never needed.

    With the demise of Bond Insurance Companies, however, suddenly the Bond Insurance market was open for business with no competition.  Goldman Sachs and other issuers of Credit-Default Swaps swiftly made their appearance.  They filled the "void" with Credit-Default Swaps, an unregulated form of Insurance.  The CDS's, as they are known, were sold by issuers like Goldman Sachs for the supposed security of investors buying munis, just as local governments once paid Premiums on Bond Insurance.

    There was a problem in California (and perhaps elsewhere), however.  In California, Goldman Sachs also marketed the State's munis at the same time that it was hawking its own Credit-Default Swaps to back those munis on the ground that California might default on the munis.  (Ironically, California has reportedly NEVER defaulted.)

    This has struck some as a possible conflict of interest, although apparently the current Securities and Exchange Commission apparently has decreed that it is not a conflict of interest for one division of a large business entity to market munis, while a different division of the same entity disparages them in order to market its Credit-Default Swaps guaranteeing the face amount of the munis should they default.  See Sharona Coutts, Marc Lifsher and Michael A. Hiltzik, "Goldman Sachs Urged Bets Against California Bonds it Helped Sell" (Los Angeles Times Online, Tuesday, November 11, 2008).  It appears from the linked article that Goldman Sachs has discontinued the practice.  See id.

    "Indeed, what some traders found perplexing about the push for a market in municipal credit default swaps was that muni defaults almost never happen."  Id.

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Municipal Bonds: What Insurance?

    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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Bonds, Bond Insurance, Bailouts and Bull Dinky.

    Bonds are at the heart of the credit chaos gripping the world right now.  Bonds are a major source of grief to cities and school districts which suddenly find themselves on the hook for guarantees they never fully realized they made, for example.  Chares Duhigg and Carter Dougherty, "From Midwest to M.T.A., Pain From Global Gamble" p. 1, col. 1 (New York Times Nat'l Ed., Sunday, November 2, 2008).

    Bond Insurance Companies were on solid footing financially when they stuck to insuring bonds.  Once they left their only known area of expertise and ventured for example into the land of subprime mortgage securitization, they began losing their Credit Ratings.  Without their Credit Ratings, they lost the ability to insure bonds.  Without their ability to insure bonds, they are apparently headed for bankruptcy -- except that some Bond Insurance Companies are lining up for a Federal handout, if they can get it.  Peter Whoriskey, David Cho and Zachary A. Goldfarb, "Treasury, FDIC Near Deal on Mortgage Aid" (Washington Post.com, Thursday, October 30, 2008).

   Finally, the current Chair of the Federal Reserve has recently told people attendng a symposium at U. Cal.-Berkeley on mortgages and the economy, that it may be worth the while of the Federal Government to consider making a new Federal agency, one to issue Bond Insurance in connection with mortgage financing.  David Stout, "Bernanke Sees Role For U.S. in Homes" p. B3, col. 6 (New York Times Nat'l Ed., Business Day Section, Saturday, November 1, 2008), published online with the headline, "Bernanke Says Mortgage System Needs Safeguards"..

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Credit Rating Companies Rated "Conflicted" by Congress.

    Credit rating companies are under fire for inherent conflicts.   Credit raters are paid by the companies whose credit they rate.  See generally Gretchen Morgenson, "House Panel Scrutinizes Rating Firms" p. B1, col. 6 (New York Times Nat'l Ed., Business Day Section, Thursday, October 23, 2008)(published online under the headline, "Credit Rating Agency Heads Grilled by Lawmakers").

    Credit rating companies play an important role in rating the credit of Bond Insurance Companies, as has been posted here many times.  Without a high credit rating, Bond Insurance Companies have tanked, to put it in the current vernacular.

    The current credit crisis is also in large measure a result of Credit Rating Companies not necessarily accurately reflecting the Credit Rating of their sponsors, it is reported.  Until recently, investors allegedly depended on the high Credit Ratings assigned by the Credit Rating Companies to guarantors of some securities that now have now value.

    For example, Credit Rating Companies are reportedly responsible for triggering a slew of "multimillion-dollar collateral calls" made on Insurance Companies which previously guaranteed the payment of mortgages and other assets.  The Credit Rating Companies have only now lowered the guarantor Insurance Companies' credit raitngs, seemingly all of a sudden.  This contributes a lot to the current credit fiasco.

    The guarantor Insurance Companies are finding to their surprise that 'suddenly' their own credit ratings have been marked down by the Credit Rating Companies.  When the Insurance Company's credit rating is downgraded, nervous investors "call the collateral".  Nervous investors thus demand payment, now.

    A reported example of this dreadful effect caused by credit rating downgrades is AIG.  AIG has recently acquired a Federal Taxpayer bailout involving $123 Billion as a result, and may demand more.  David Cho, Binyamin Appelbaum and Zachary A. Goldfarb, "Bailout Expands to Insurers" (Washington Post.com, Saturday, October 25, 2008).

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Munis: "Where is the Insurance?"

    Local government bond issues, called "munis," are facing tough times during this credit debacle.  States and Local Governments are having a hard time borrowing money.   Bond issues have reportedly been delayed or cancelled that would have brought revenue to housing agencies in California, Florida, Texas and Virginia, and that would have helped to finance other projects as diverse as hospital emergency rooms and cancer centers, sewage treatment plants, and airport terminals in Montana, Georgia, and the District of Columbia, to name only a few.  E.g., Marc Lifsher, "Credit Crunch Puts California Governments in a Corner" (Los Angeles Times Online, Thursday, October 2, 2008); Mary Williams Walsh, "Cities Are Cutting Back Projects" p. A1, col. 5 (New York Times Nat'l Ed., Wed., October 1, 2008).

    The collapse of credit ratings for Bond Insurance Companies was the subject of many recent posts in this space.  The bottom line is that Credit Rating Companies once gave such high ratings to the Bond Insurance Companies that they prospered; however, the Bond Insurance Companies ceased to prosper -- actually, they went into free fall (or freefall, as you prefer) -- shortly after they wandered far afield into the muck of a system which exalted the now-discredited Credit Default Swaps and Collateralized Debt Obligations.  These adventures not only failed in their own right, but the failures brought down the once-high Credit Ratings of the Bond Insurance Companies that departed into these discredited adventures.

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Credit Rating Companies Revisited.

    Credit Rating Companies like Moody's Investors Service are at it again.  They are threatening to downgrade the credit ratings of two formerly large Bond Insurance Companies, Ambac and MBIA.  See Jody Shenn and Christine Richard, "Ambac May Delay New Insurer After Moody's Warning (Update 1)" (Bloomberg.com, Friday, September 19, 2008).  Apparently the Credit Rating Companies just found out that there is a credit market crisis and that the Bond Insurance Companies may not be worthy of a high-value credit rating.

    Since the Credit Rating Companies were responsible for totally mis-rating the credit of Bond Insurance Companies for decades, it is not reasonably justifiable to rely on them now to rate the credit of other companies, such as AIG, Freddie Mac, Fannie Mae, Merrill Lynch, or Lehman's, or any other.

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Bond Insurance Companies May Not Pay Out on Auction-Rate Bonds ....

....  Auction-Rate Bond Marketers Are Buying The Bonds Back Rather Than Pay Potentially Much Greater Penalties in Proceedings Pursued by State Regulators.   

    One-time sellers of Auction-Rate Bonds are buying them back rather than face paying penalties.  Regulators of the sellers have launched investigations across the nation, and these local governmental investigations are resulting in settlements by which the sellers reduce their potential penalties exposure in return for protecting the people and local goverments to which they rather aggressively sold these securities.  Allegedly, the once-upon-a-time sellers kept selling Auction-Rate Bonds even after the market dried up for them -- in a niche market.  That means that, allegedly, the sellers knew the conditions of that unique market and most buyers did not.  Interview With Massachusetts Secretary of State William F. Galvin, "Still Sorting Out The Auction-Rate Mess/Galvin's Office Addresses Conflicts" (Boston Globe Online, Sunday, August 31, 2008).

    To offer a helpful definition here, adding to past posts about Auction-Rate Bonds and other types of Bonds which drew Bond Insurance Policies, Auction-Rate Bonds "are investment notes or securities or bonds -- financial commitments" which were treated like cash because they could be bought and sold with ease in their heyday.  This "high degree of liquidity" came from "a process of periodic rebidding."  Id.  The rates of Auction-Rate Bonds and Securities were regularly reset at auction, in basic and simple terms.

    Conflicts of interest are at the heart of investigations into the sale and purchase of other securities, such as Mortgages, and the sale and purchase of commodities, such as oil, wheat and cotton.  "There's not adequate supervision," says Secretary Galvin.  "We're all committed to a free market economy.  But a free market only works when it's truly free and it's not rigged."  Id.

    Settlements by Auction-Rate Bond sellers by which they buy back the Bonds they once sold with relish, may have the effect of preventing Claims on Bond Insurance Policies before the Claims can ripen.  That would be a positive effect for Bond Insurance Companies for certain.

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Credit Default Swaps: The New Credit Insurance.

Ask the Bond Insurers.

     Credit default swaps are "financial instruments" of a special nature.  They "are privately traded insurance contracts that let people bet on companies' financial health."  Gretchen Morgenson & Vikas Bajaj, "MBIA Debt is Setting Up a Quandary" p. C1, col. 5 "Business Day" Section (New York Times Nat'l Ed., Wed., June 18, 2008).

     According to the Wikipedia Online Encyclopedia, "Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against credit events such as a default on a debt obligation. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes."  Wikipedia Encyclopedia entry for "Credit Default Swap".

     The workings of credit default swaps are illustrated by what many had assumed is the precarious financial condition, and the apparently glaring need for an infusion of capital, at the Bond Insurance Company MBIA.  MBIA reportedly wrote $137,000,000,000.00 or $137 Billion of credit default swaps which provide that their purchasers can demand immediate payment if the Bond Insurance Company either (1) becomes insolvent or (2) is taken over by state regulators.  Morgenson & Bajaj, supra.  This is reportedly a huge hammer for MBIA in the face of calls by such as the New York State Insurance Superintendent to raise some $900,000,000.00 or $900 Million for the Bond Insurance Company; if MBIA defaults on the credit default swaps, in basic and simple terms, MBIA arguably does not need the additional capital if all its money is going to pay off the credit default swaps.

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Credit Ratings Equality Foreshadows No More Bond Insurance.

     Unnamed "investors and analysts" see no need for Bond Insurance whatsoever if a credit ratings company rates Municipal Bonds by the same assessments that it uses to rate Corporate Bonds, it is definitely reported by Michael McDonald, "Moody's Muni Ratings Overhaul Undermines MBIA, Ambac (Update 1)" (available at www.Bloomberg.com, Friday, June 13, 2008).

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Munis to Receive Equal Credit Rating Treatment?

     The credit of Municipal Bonds may soon be rated the same exact way that the credit of Corporate Bonds has always been rated.  This may mean that there is no longer a need for Bond Insurance.  See Vikas Bajaj, "Moody's May Align Municipal Debt Ratings With Corporate" p. C5, col. 1 "Business Day" Section (New York Times Nat'l Ed., Friday, June 13, 2008).

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Bond Insurance Companies Ratings Drop.

     As previously posted here, MBIA was the No. 1 Bond Insurance Company.  Ambac Financial stood in at the No. 2 position.  Until recently, perhaps.  Their respective credit ratings have both been downgraded below the rating that has always been necessary in order to sell Bond Insurance.  The developments are reported in several places including Reuters Report, "Moody's May Downgrade Ratings of MBIA and Ambac Units," p. C2, col. 1 (New York Times Nat'l Ed., Thursday, June 5, 2008), available online at www.nytimes.com; and Associated Press Report, "Stocks & Bonds/Investors Fret Over Financial Sector," p. C10, col. 4 (New York Times Nat'l Ed., Thursday, June 5, 2008), available online at www.nytimes.com.

     In the meantime, three of the Credit Ratings Companies reportedly have reached or are negotiating a deal with the New York State Attorney General to change some of their business practices -- although not the source of their income, which when they began in that business was the person asking to find out a rating but now is, and would remain, instead the business that is being rated.  The reported deal would also leave unchanged the opportunity for the business purchasing the services of a Credit Ratings Company to go to another Credit Rater if it did not like the rating, which it would not be compelled to disclose even as it shops for a better rating.  See, for example, "Moody's, S&P and Fitch Agree to Deal on Fees," published on Friday, June 6, 2008 by the Los Angeles Times Online "From Times Wire Services", available online at www.latimes.com;  Jenny Anderson & Vikas Bajaj, "Rating Firms Seem Near Legal Deal on Reforms," p. C1, col. 5 (New York Times Nat'l Ed., Wed., June 4, 2008), available online at www.nytimes.com.

     "The deal with [the New York State Attorney General] applies only to debt backed by U.S. subprime and other so-called non-prime loans."  "Moody's, S&P and Fitch Agree to Deal on Fees," supra.

As soon as the web log host, TypePad, provides again the opporunity to hyperllink directly to these sources, the author will try to make that happen but it is not possible to do so at the time of this post.  Instead, the websites of the sources should work and for that reason are made available here in the interim.

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