Insurance Claims And Issues

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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Bond Brokers, Banks Heavy Local Tax Burdens.

     Bond brokers could not sell the auction-rate bonds that they advised States, Counties, Cities, Hospitals, Schools and other bond-issuing local governments to issue and now taxpayers are paying credit banks on Wall Street penalties because the local governments are getting out of the auction-rate bond market and in at least one case canceling "an interest-rate swap agreement," it is reported by  Michael McDonald, "Citigroup Leads Wall Street Drive to Hurt Taxpayers (Update 2)" (Bloomberg.com, Friday, May 9, 2008).

     It is also reported that bond brokers are receiving new fees to sell bonds that need to be issued to replace the revenue lost with the failed auction-rate bonds.

     Swaps smell suspiciously like unregulated Insurance.  Whatever they truly are, for local governments entering into them, swaps failed.

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Credit Raters Examined!

      Many specifics and lots of broad implications about the workings of credit rating corporations including their roles in Insurance are discussed in Roger Lowenstein, "Triple-A Failure," p. 36 (New York Times Sunday Magazine, April 27, 2008).  One thing is hardly mentioned but fairly clear:   While the credit rating corporations recognize that their models of evaluating subprime mortgages and collateralized debt obligations were inadequate if not counterproductive by providing a rating structure on paper or in theory, but not in reality, it does not appear that any of the credit rating companies ever declined even one opportunity to be paid large amounts of money to rate the credit of even one "asset-backed" financial product including Insurance.  Not one.

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Bond Insurance Companies Pull Down Citigroup Financial Results.

    Citigroup lost $5,100,000,000.00 or $5.1 Billion in 1Q2008.  Since the first day of 2008, Citigroup has also announced 13,200 related job eliminations.  In the 1Q2008, Citigroup further reported downgrading $6,000,000,000.00 or $6 Billion on subprime mortgages and another $1.5 Billion "related to exposure to bond insurers," among other markdowns to zero.  The role of Bond Insurance Companies in shaping the continuing financial free-fall is no longer the largest, but it is significant still.  Associated Press Copyrighted Story Published Online by the Los Angeles Times, "Citigroup Reports $5.1 Billion Loss on Hefty Write-Downs," Friday, April 18, 2008.

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Subprime Insurance Claims Worldwide, Not Limited to U.S.

     Brit Insurance is reportedly the largest Insurance Company in Lloyd's.  Andrea Felsted, Insurance Correspondent of The Financial Times, "Companies - UK: Brit Insurance Sets Aside 60m to Cover US Subprime Claims" (ft.com, Tuesday, March 11, 2008).  Brit received "25 notifications of potential claims under policies written to protect financial institutions."  In response, Brit set aside an additional reserve on top of the reserves it set in the ordinary course of business "to pay for [these potential] claims arising from the collapse of the US subprime mortgage market."

     The amount of the reported additional reserve is 62.5 Million Pounds.

     A spokesperson for Brit Insurance is quoted as saying that the cost of Insurance Coverage for financial institutions is now rising.

     More to come.

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"Civic-Facility Bonds" Defined.

    "Civic-Facility Bonds" appear to be a type of Municipal Bond issued by "industrial development authorities".  Sadly, they can include "auction-rate debt," it is reported by Darrell Preston & Linda Sandler, "Horace Mann Yields Surge as Schools Stuck by Auctions (Update 1)" (Bloomberg.com, Wed., March 26, 2008).

    A definition a day helps the lack of knowledge go away.  Still, the question is:  Is Bond Insurance really necessary for the party that issues Municipal Bonds or the party that buys Municipal Bonds, of any kind?

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What For O Bond Insurance?

    The two largest public pension funds in the United States are both reportedly in California:  the California Public Employees Retirement Fund and the California State Teachers' Retirement System.  Together they hold $415,000,000,000.00 or $415 Billion in assets.  They also both "already guarantee municipal issues through letters of credit."  No wonder then, that the Treasurer of California is encouraging both funds to take the next step and form their own Bond Insurance Company as an alternative and a competitor to the high Premiums charged by private Bond Insurance Companies, it is reported by Josh P. Hamilton & Christine Richard, "Callifornia Rebuffs Buffett's New Muni Bond Insurer (Update 1)" (Bloomberg.com, Friday, March 28, 2008).

    To say again what has previously been posted in this space, it is also reported in the linked news article that Corporate Bonds defaulted at much higher 10-year rates than so-called Munis or Municipal Bonds.  Yet, inexplicably perhaps, the credit rating corporations reportedly rate the credit much lower for Munis than for Corporate Bonds.  This development, too, has previously been commented on here and many issuers of Municipal Bonds are wondering why the credit raters are allowed to treat them differently from Corporate Bonds, so much so that the parties which issue Munis are forced to purchase commercially available Bond Insurance in order for the credit raters to rate their credit high enough for investors to invest in Munis.   Josh P. Hamilton, "California May Wage Proxy Battle to Alter S&P Ratings (Update 2)" (Bloomberg.com, Thursday, March 27, 2008). 

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