Mover Mike

I was registered as a stockbroker in 1969 and sometime in the 1970's we started seeing insured municipal bonds, insured by an insurance company as to payment of principal and interest. According to a new Pershing Square Capital Management, L.P. report, How to Save the Bond Insurers, only general obligation or G.O. muni bonds had this insurance. The question I always asked was why does a G.O. need insurance, it is protected by a taxing power on ALL the property in the district, be it a state, county or city. G.O.s were either AAA or AA rated without the insurance and the insurance made the issue AAA.

Pershing says like all good things this one came to an end and when the returns were compressed by competition. So bond insurance companies bagan to write insurance on Utilities, Hospitals, Toll Roads, etc. where credit profile was based on meeting projections rather than tax-payer support. These munis were marketed as AAA, but I told my clients to avoid them, if they couldn't stand on their own as AAA or AAs.

As late as 1990, 100% of the insurance was involved with public finance issues. Pershing says that by 2006, due once again to compressed returns, 32% of the insurance was used to GUARANTEE Structured Finance. Structured Finance transactions at MBIA and AMBAC now account for 66% and 55%, respectively, of their insurance transactions. Pershing says that the annual premium as a percent of the bond insurers exposure was insufficient at 18 bps and 21 bps, respectively. In order to reach 12% ROE, the insurers needed to use extreme leverage of near 150 to 1.

The report singles out MBIA and AMBAC holding companies as insufficiently capitalized and the underlying business is going south fast. Pershing expects the holding companies will be unable to raise sufficient capital and face bankruptcy!

Mish's Global Economic Trend Analysis posted AMBAC Blows It...Again!

AMBAC MBIA Structured Finance

Bond Insurers Mover Mike