Monoline datapoint of the day
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Bloomberg reports:
Ambac, MBIA Inc. and Assured Guaranty, the three largest bond insurers, have set aside 0.04 percent of the total public finance debt they insure, or $520 million, to pay claims on municipal securities, according to regulatory filings by the companies.
No, that’s not a misprint: the claims-paying reserves are 4 basis points of the total quantity of municipal bonds insured. What’s more, the market capitalization of all three monolines combined is less than $5 billion; the amount of municipal bonds insured, by contrast, is well over $1 trillion.
What could possibly go wrong?
Update: MBIA’s Kevin Brown emails to point out that loss reserves are not the same thing as total claims-paying resources, which are $5.5 billion at National Public Finance Guarantee, the muni arm of MBIA. That’s about 1.1% of its insured bonds.
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But municipal bonds are backed by the full faith and credit of… of…
Ambac, MBIA etc. are New York regulated, in the event of a failure, I am sure the Treasury and great State New York, would welcome the opportunity to pick up the pieces.
Most have forgotten the Dinallo, Spitzer show that captivated financial media only 24 months ago and assumed the little problem was resolved.
Time to brush off those old articles about the mechanics of bond insurance and historic default rates and regulators gone wild.
With all due respect, Felix, muni investors should file this datapoint under “Who Cares?”. At this point, no sensible muni investors are looking to the monolines to provide any meaningful assistance. If you look at CDS spreads or bond yields for those three monolines, *all* are trading at junk levels. If Ambac goes bankrupt (they have 2011 bonds trading at 77% yields, so clearly the market thinks it is quite possible), methinks it will have minimal impact on the trading in Ambac-insured muni bonds.
And have you read Chapter 9? And any of the State laws and regs that cover municipal bankruptcy? As I recall, Bridgeport, CT had to go to the State legislature to get a Chapter 9 filing certified, and THEY TURNED THEM DOWN. Recently the managers of Valleo, CA tried to raid some of their sewer revenues to cover a general revenue shortfall, and the court said no….
I know it’s hard work, but municipal finance is a lot of arcane rules and specific regulations. You can’t just liquidate the assets and dissolve the corporation.
Yes, municipalities can go bankrupt, just as sovereign states can. But it’s not as simple as an Enron (or Lehman) Chapter 11 filing. That’s why loss rates are so low.
Point taken – Some mono-line insurance may be overextended; but Mr. Salmon may want to cite different statistics if this is something he wishes to prove.
1. The trillion+ figure that is mentioned refers to the maturity or face value of insured bonds in the municipal marketplace.
a. Most muni bond insurance does not pay face value instantly in event of default. It is primarily designed to make payments until the issuer (the municipality) can resume payments. Therefore, because the one trillion+ of bonds represents varied maturity dates spread out over decadesthe debt burden on the mono-line insurers, even if the entire insured muni market somehow managed to default at the same time (the chance of this is a staggering improbability) would not be a whopping 1 trillion all at once.
b. We are talking about three, albeit the three largest, insurers. This does not represent all mono-line insurers.
2. Market Capitilization? Completely irrelevant. Private companies, for an extreme example, have a market capitlization of $0. Market cap is most commonly the combined value of a company’s common stock oustanding. This figure has little to nothing to do with the viability of a bond insurer, their reserves, or the amount of debt that they insure. Further, an insurance company’s reserves could be above or below their market capitalization, which depends on price movements, stock market conditions, etc. Connecting the safety of an insurance company to their market capitalization makes very little sense.