ECONOMIC developments
Consequences of Lying Economic Stats
A lesson on Banking & housing prices
McCain/Republican planned tax cut plus Housing Market Crunch
Sub-prime Bailout--banks, not homeowners
Neoliberalism, their global agenda--jk
Neoliberalism, Robber Barons, an historical view--jk
Neocon Economics Data--Reagan to Bush
US DEBT--explained
What 2008 has in store
The Great Debt Crisis Begins-08
Debt to Grow, Whomever is Elected
Trickle-down shit
Analysis of effects of tax cuts--exposes the neocon lie
Municipal Bonds are impacted by home loan defaults--dominoes
Let Them Die, the position of big PHARMA and WTO trade treaties
Financialization, the major new economic trend
China, poverty and manufacturing
Globalization and the Super Rich
Municipal Bonds are impacted by home loan defaults--dominoes

The 4 principled Muni bond insurers from 01-06 have covered $1 trillion of U.S. municipal, school, transit, and other public work bonds.  They also have gone into the home market—which currently is in crisis.  This raises doubt about these insurers viability—the spreading cancer-jk. 


The Huffington Post at


Max Fraad Wolff, 12/19/07


Mortgage Market Metastasis

Our saga of consumer debt difficulty continues to metastasize and generate tumors in far flung economic organs. Today (December 19, 2007) it became clear that cities and towns will be facing less available credit and paying more for the credit they get. This is important because it means that Americans will be faced with a slowing economy and cash-strapped local service providers. As the economy slows, more folks need more help from local social programs.

Inevitably, rising demands for help will collide with falling local budgets. American municipalities have been cutting taxes for some time, and they have survived by reaping increased revenue from rising property values and taxing housing activity. When this revenue left their budget short, they sold future tax returns to investors seeking insured bonds with tax advantages. In other words, they sold insured municipal bonds.

These municipal bonds are "safe" because they are insured by specialized firms -- monoline insurers. All at once, housing is in trouble, property values are falling and municipal bond insurers are not looking good. This is not a minor technical or financial matter that you can easily ignore. About half of all US municipal bonds are ensured by 4 companies: Ambac, FSA, MBIA and FGIC. As of November 2007, these firms covered $2 trillion in bonds. These bonds and their insurance are essential parts of the operation of American localities.

Municipal bond insurance assures investors that the debt issued by cities and towns will be repaid, principle and interest. Thus, it removes risk and allows investors to confidently allocate capital to municipalities. On the other side of the market, insurance allows city and town much greater access to funds at lower cost. Issuers must be regularly rated by state insurance agencies and credit ratings agencies. New York and California State Insurance face regulation and in-depth scrutiny from Moody, Standard & Poor and Fitch, which allows the highest ratings to be awarded to many bonds.

So, insurers regulate the quality of the municipal bonds and offer insurance to the cities and town that issue them. Meanwhile, credit ratings agencies regulate the insurers to assure that they have the highest rating, AAA. This rating requires that issuers meet minimum standards of management, risk control, capital and strength in the face of prolonged economic downturn. Across the past several months ratings agencies have downgraded and warned about the economic health of bond insurers. When bond insurers face questionable health, the bonds they insure are called into question. This means tens of thousands of municipal bonds may be downgraded and lose value. For example, on December 19, 2007 S&P downgraded the small insurer ACA. This immediately raised suspicions regarding the four leading industry players.

Municipal bond issuance is vital to the ability of American cities and towns to improve roads, invest in schools, provide affordable housing and invest in infrastructure. These bonds also allow cities and towns to fund mismatches between tax revenues and community spending needs. Affordable bond insurance saves towns and cities money and allows them access to more credit at lower cost.

Bond insurance is cost effective for an issuer as long as the interest cost savings exceed the premium paid to the insurer. Since the inception of municipal bond insurance in 1971, municipalities have saved more than $37 billion in borrowing costs through bond insurance, saving about $2 billion annually for the past decade. AFGI (Association of Financial Guaranty Insurers [pdf])

What is going on? Why the trouble now?

The four dominant firms in this business, Ambac, FSA, MBIA and FGIC, have been increasingly active in insuring US home mortgage bonds and pools of home mortgage bonds. As of January 01, 2007, the four leading firms insured approximately $570 billion in structured financial product -- largely home mortgage bonds, pools of home mortgage bonds. Included in the structured product is $249 billion in mortgage and home-related debt and debt product. The firms that insure municipal bonds have rapidly and profitably grown their business divisions related to insuring the payments and value of debt instruments made up of home mortgage payments. This includes sub-prime home mortgages. The insurers have underwritten insurance on the principle and interest payments of American home purchasers and refinancers. These payments have been defaulting at elevated rates as house prices fall.

By now you should have guessed where this was going. The size of the commitments to insure against defaults on bonds and other securities comprised of home mortgages is very large. Since we had not seen sustained declines in national home prices since the Great Depression, insurers and ratings agencies accumulated huge default risk against home mortgage-backed bonds and financial vehicles. As losses mount, there is increasing pressure and suspicion regarding the ability of some insurers to stay healthy and highly rated. As defaults mount, insurers risk being forced to pay out on the insurance they sold. This may put a long term and very expensive strain on these firms. These strains may result in downgrades in the credit quality assigned to these insurers. This creates systematic risk to the credit ratings of the municipal bonds they insure.

Strains on insurers are likely to pass on to municipalities looking to secure funds. The turmoil in mortgage markets is bleeding over into municipal bond markets through stressed insurers. This will likely occur alongside stresses to local budgets from changes associated with a national housing downturn. Claims for services will rise. We expect falling tax revenues whenever we have an economic downturn at the end of consumption driven boom. Rising home value assessment will become falling home value assessment. Revenue from home sales will slump. More households will be late or delinquent in making tax payments. These stresses will motivate localities to raise cash by selling municipal bonds. When they attempt to enter this market, they are likely to confront increased difficulty in getting insurance, increased costs for insurance and higher required interest payments from investors.

This is what a broad structural credit crisis means. It means metastasis. Disease in one vital economic organ -- housing -- spreads to other vital economic organs -- local finance......


Max Fraad Wolff is an economist and free lance researcher/writer. His work regularly appears in the Asia Times, The Prudent Bear and many other international outlets. His work can also been seen regularly on his site Based in NYC, Max does contract research on international financial risks and opportunities while teaching in the New School University's Graduate Program in International Affairs.

To remove regulations (as the neoliberals recommend and do) is and would be like ending steroid testing of professional athletes.  Financial institutions are driven to produce high rates of returns so as to acquire investors’ funds.  Professional athletes are driven to perform as well as their competitors for their position, thus taking steroids becomes a prudent career choice.  High risk patterns of investing almost always implode—the S&L collapse during Reagan’s misadministration is the most conspicuous example.  Under Bush, or shortly thereafter, we are likely to have more implosions.  The S&L collapse resulted in defaults of $500 billion (this figure includes estimated interest payments on U.S. government borrowing as part of the government insurance obligation on accounts).  The wisdom of Roosevelt must be relearned--jk.



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