Friday, November 30, 2007

A Business I Never Understood-5

"California, the largest borrower in the U.S. municipal market, sold $1 billion of general obligation bonds without insurance, joining a growing number of issuers questioning the value of buying such coverage. ... 'The premium to be realized from bringing a deal insured has widened enough that a lot of these issuers are just saying, "let's go uninsured", if nothing else to test the waters,' said Evan Rourke, a municipal portfolio manager at M.D. Sass Associates in New York',", 30 November.

"When you take big risks, you expect big rewards if all goes well. Right? Well, not in early 2007. ... Essentially, they were guaranteeing, for 10 years, the credit of a group of financial companies, including credit guarantee insurance companies like Ambac and MBIA. A lot of defaults would be devastating to the investors, but so, too, would be rising market doubts about the quality of the companies' credit. ... They were guaranteeing the credit of the companies that guarantee the credit of large parts of the financial system. And they were guaranteeing that people would trust the credit of those companies. When this deal was put together by UBS in March, Moody's figured it was a sure thing and gave it an AAA rating. It seemed so safe that the upside ... was ... the Libor rate plus one percentage point. ... The financial engineeers persuaded people that big risks could be financed mostly through safe investments. ... The ready availablity of that financing encouraged more risks to be taken by lenders. ... In retrospect, it was inevitable this would blow up", Floyd Norris, in the NYT, 30 November.

In retrospect? It was always obvious! Now that the credit guarantors have been exposed as financial "Wizards of OZ", the various municipalities will abandon them.

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