Issue of the week: Bond insurers under the gun

“The clock is running out” for the three leading U.S. bond insurers, said Karen Richardson and Damian Paletta in The Wall Street Journal. Democratic New York Gov. Eliot Spitzer told Congress last week that the insurers—MBIA, Ambac, and FGIC—have just days to raise new capital to protect their own credit ratings. (Spitzer was invited to testify because the insurers and many financial firms are headquartered in New York.) If the insurers can’t solve their problems on their own, Spitzer said, the state’s insurance regulators will be forced to step in. For decades, bond insurers have guaranteed the principal and interest payments on bonds issued by states, cities, and towns. But in recent years, they have waded into “the risky business of insuring complex mortgage-related securities,” which has “put them on the hook for potentially billions of dollars in claims as the housing market stumbles.” The claims have imperiled the insurers’ blue-chip credit ratings, on which they depend to maintain investor confidence in their guarantees. Without their triple-A ratings, the $2 trillion in bonds that these companies insure could suffer steep price declines, leading to massive paper losses for bondholders and higher borrowing costs for municipalities.

FGIC, the weakest of the three insurers, was the first to heed Spitzer’s warning, said Liam Pleven, also in The Wall Street Journal. The day after Spitzer’s testimony, FGIC said it would “create a new company to insure safe municipal bonds.” FGIC itself would “keep responsibility for riskier debt securities already insured, such as those tied to the housing market.” But FGIC’s announcement may be a negotiating ploy. Like the other insurers, FGIC has been trying to raise capital from banks that stand to lose billions if the mortgage bonds they own lose their insurance protection. FGIC’s decision to split itself up “could serve as an incentive to get the banks to step up to the plate on a cash infusion.” And it could be the beginning of a trend, said Christine Richard and Shannon Harrington in MBIA chief Joseph Brown said this week that his company may also split its guarantee business in two. Analysts say the companies have little choice. The message the companies are hearing from regulators, said Bank of America analyst Michael Barry, is “act soon, or be acted upon.”

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