Monday, May 18, 2009

The Government May Enter Muni Bond Insuring Business

I knew it! I knew it was coming. According to Bloomberg,

"The National League of Cities says it will ask the U.S. Treasury today for a $5 billion interest-free loan to capitalize a new municipal bond insurer it plans to create."

So we, taxpayers, get to fund a muni bond insurer who will insure muni bonds which are the obligations that we, taxpayers will eventually have to pay.

"The Issuers Mutual Bond Assurance Co. would be the first publicly owned U.S. financial guarantor. The $5 billion capitalization would make it the biggest in the industry, eclipsing MBIA Inc.’s capital base of $3.8 billion and the $1.1 billion of current market leader Assured Guaranty Inc. "

This is the "business plan", as presented by the National League of Cities. (I don't think it would pass the scrutiny at any venture capital, but then they have Treasury Department.) The largest business risk that they foresee is that the federal government may enter the forey:

"... the federal government could create a competing company that charges premiums so low that the Issuers Mutual could not possibly compete. This will be most unlikely if the U.S. Treasury invests $5.0 billion in Issuers Mutual, as planned. But it is possible that the Congress might enact legislation creating such a company, notwithstanding the investment by the Treasury. In such case, the Company would cease operations..."

They seem to be aware of the risk of premiums collapsing, but they dismiss it as unlikely. Again back to Bloomberg,

"IMBAC, as the new insurer would be known, is asking Treasury for $3 billion in cash upfront. It said it would seek to insure only general obligation and essential-purpose revenue bonds. In its cash-flow projections, the firm said it would charge premiums equal to about 70 basis points on a 25-year bond."

That seems like an overly optimistic business projection to me. Bloomberg again,

"In a December report, the League observed that in 2006, premiums for bond insurance had dwindled to as low as 15 basis points. Last week, Richard E. Kolman, the executive vice- chairman of MIAC, the Macquarie-Citadel venture, said he thought insurers might charge 30 basis points to 75 basis points to back A rated general-obligation debt. "

Sign of times.

First it was mortgage companies (FNM, FRE), then an insurer (AIG), then major national and regional banks, then car companies (Chrysler, GM), and now a municipal bond insurer. Healthcare is fast joining them. If the government add a large homebuilder or two, a major oil company (in order to kill it), a large media outlet (some say the media is already "owned"), a large consumer staples company or two, we will be solidly on our way to ___________. (Fill in the blank, any way you see fit.)

Disclosure: I own the shares of one of the "failed, shareholder-owned" bond insurers (ABK).


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