American Public Media's Marketplace
 

Bond Insurer Losses May Hit the Streets

Jan 31The world's largest bond insurer, MBIA, posted a quarterly loss of $2.3 billion largely due to fallout from mortgage-backed securities. Ashley Milne-Tyte reports on the impacts on government projects funded by municipal bond markets.

KAI RYSSDAL: Bond insurance is nobody's idea of a good time. We'll grant you that. But it's the newest and possibly most troubling wrinkle as the subprime squeeze plays out. These guys have traditionally been in the business of insuring regular old municipal bonds. Then they started insuring mortgage-backed securities. And we all know what's been happening there.

Now there's real concern those insurers don't have the cash to pay up if enough mortgage-backed bonds default. This morning the world's biggest company that insures bonds for a living, MBIA, posted a quarterly loss of more than $2 billion. MBIA CEO Gary Dunton did the traffic-cop bit. He said he's confident the company will find the cash it needs. But Standard and Poors doesn't think so. This afternoon the credit rating agency announced it's considering a downgrade to MBIA's triple A rating.

Ashley Milne-Tyte has more from New York.

 

ASHLEY MILNE-TYTE: MBIA isn't the only bond insurer under threat. Christopher Whalen is managing director of Institutional Risk Analytics. He says if the insurers are downgraded they could drag the entire market down with them.

Christopher Whalen: It's almost as though a part of the frame of a house was weakened and therefore the entire house was compromised. The bond insurers play a very particular and very important role.

Whalen says MBIA and others guaranteed complex mortgage-backed securities.

Marilyn Cohen is president of Envision Capital Management. She says if MBIA is downgraded, those securities will be deemed riskier as well.

Marilyn Cohen: Many of these collateralized debt obligations will then have to be sold, or the banks that still hold many of them will have to take additional multibillion-dollar write-offs, and it's all that ripple effect in the financial markets that everybody's worried about.

That ripple could swamp the municipal bond market. Municipalities depend on the insurers to guarantee their bonds.

Joseph Fichera of financial advisory firm Saber Partners says municipal bonds trade at a certain level in part because of their insurance.

Joseph Fichera: People will rethink that now. And those prices and marks to market will have to be done in terms of what the value is based upon these new parameters of the risk associated with these securities.

The riskier the bond, the less likely investors are to buy it. That's bad news for the municipalities who depend on the income.

I'm Ashley Milne-Tyte for Marketplace.